When In Doubt, Raise the Reserves
China has decided to try to curb inflation (or shall we say more inflation) by requiring that banks hold a higher amount of reserves. (Source)
[Thanks to reefsanctuary.com and Witfull for this photo.]
You see, they have so many dollars and dollar instruments already in their collective accounts that there would be excessive credit expansion without someone intervening.
Mind you, there wouldn't be need of this intervention if they hadn't intervened in the dollar/yuan exchange rate already. (See this post for an explanation of Chinese pegging.)
The Chinese have been accumulating dollars and dollar instruments at a rate that is inconsistent with international trading and monetary practices; but they have been doing it anyway, and in spite of much international mock-frowning. They must park the stuff somewhere, so they park it in their bank reserves. Then, because banks' whole purpose in life is to create credit, and because they do this on what is called a reserve banking system, this means that for every $100 or 100 yuan they hold as deposits, they can create 900 more, making a total of $1,000 or 1,000 yuan worth of liabilities (assuming that they, like us, have a 10% reserve requirement. In fact, they're at 9.5% now.)
They have already lifted the reserve requirement three times last year to help alleviate the problem of excess credit (or, more appropriately, excess excess credit), and now they have to do it again.
Why can't they just stop intervening in the dollar/yuan exchange rate and let things work themselves out? Well, this is a long story that I have delved into at the above-mentioned link, and here.
[Thanks to reefsanctuary.com and Witfull for this photo.]
You see, they have so many dollars and dollar instruments already in their collective accounts that there would be excessive credit expansion without someone intervening.
Mind you, there wouldn't be need of this intervention if they hadn't intervened in the dollar/yuan exchange rate already. (See this post for an explanation of Chinese pegging.)
The Chinese have been accumulating dollars and dollar instruments at a rate that is inconsistent with international trading and monetary practices; but they have been doing it anyway, and in spite of much international mock-frowning. They must park the stuff somewhere, so they park it in their bank reserves. Then, because banks' whole purpose in life is to create credit, and because they do this on what is called a reserve banking system, this means that for every $100 or 100 yuan they hold as deposits, they can create 900 more, making a total of $1,000 or 1,000 yuan worth of liabilities (assuming that they, like us, have a 10% reserve requirement. In fact, they're at 9.5% now.)
They have already lifted the reserve requirement three times last year to help alleviate the problem of excess credit (or, more appropriately, excess excess credit), and now they have to do it again.
Why can't they just stop intervening in the dollar/yuan exchange rate and let things work themselves out? Well, this is a long story that I have delved into at the above-mentioned link, and here.
posted by Katy Delay at 5:50 PM
0 Comments:
Post a Comment
<< Home