Friday, January 16, 2009

Monetary policy of China - is it a fault line?

Prof. Micheal Pettis is one of best commentators on China. His latest post on monetary conditions in China is a little scary. I have few points:

  1. I don't think China will be able to undertake fiscal expansion to the scale required.
  2. A monetary contraction is higly likely to impair Chinese financial system.

Essentially China is exactly where US was in Great Depression. The scale is different and scale can be China's enemy no.1! Further China agreeing to fund further US treasury expansion looks unreasonable. It will possibly compound the problems - as China cannot accept the entire lot US dishes out and retain enough capacity to wait it out. It is at this point fair income-distribution structure prevents social unrest. China will have to fix this urgently.

In sum, thats a whole lot of trouble heading China's way. Thankfully, Chinese government acts fast - let us hope it does so now as well. Else all the world is going to be in trouble!