Does People’s Bank Of China Matter More Than The Federal Reserve?5 May, 2011, 3:39. Posted by Zarathustra
Tags: Economy, People's Bank of China
I have previously argued that now the People’s Bank of China matters more then the Federal Reserve in one case. In that case, it was the most obvious case even though only few people agree: Hong Kong real estate market. In fact, the People’s Bank of China may matter to the world much more than most people think.
The reason is not very straightforward. As China is getting the number two spot of the global economy after the United States, People’s Bank of China is certainly having more power now as it is managing the monetary policy of the second largest economy. And now the central bank of the world’s second largest economy is getting very hawkish (at least it sounds very hawkish).
The problems of the People’s Bank of China’s tightening are, first of all, it started too late, and it started with a piecemeal approach which did not work. But as they are getting more aggressive, eventually it will work, but the consequence will be much more severe as it started tightening too late, allowing the problems to grow much larger. Monetary policy is like a bottle of half empty ketchup: you may get nothing in the first few times you shake it; but once it comes out, it spills all over the place.
Now among the major economies in the world, the United States and Japan are still easing, while the European Central Bank has raised interest rate once (yet monetary policy remains accommodative). The Bank of England has been on hold for some time, although high inflation and weaker growth caught the Bank in a dilemma. So pretty much the only major central bank that is really tightening is the People’s Bank of China.
In a balance sheet recession (like much of the developed countries are in), quantitative easing does not really work because credit demand is low as the economy is deleveraging, so monetary stimulus is not going to make their economies much better. However, they will remain to be accommodative no matter what because they don’t have other choices, so they are the unlikely candidates that will put a brake on the global economy. However, the People’s Bank of China is tightening. Sooner or later, the Chinese economy will slow. The next question will then be whether the rest of the world can be decoupled from a slowing China.
My answer would be no.