Blogs & Comment

China tightening too much?

Is China headed for a hard landing? That's a tricky question but the authorities do appear to be overdoing things.

(Photo: ChinaFotoPress/Getty)

Interest rates in China were raised last week for the fifth time in 8 months, bringing the one-year lending rate to 6.5%. This is in addition to raising reserve requirements six times in 2011, which further curtails the bank’s ability to lend.

Policymakers continue tightening because of inflation
Policymakers continue to clamp down because June inflation accelerated to a three-year high of 6.4%, going further above the government’s inflation target of 4%. Much of the increase was due to double-digit inflation in politically sensitive food prices.

But the economy is already slowing down
However, there are signs the economy is already headed downward. Of note, the purchasing managers’ index fell to 50.9 in June, its lowest level since the global financial crisis bottomed in early 2009. Readings below 50 signal economic contraction.

Other series corroborate the deceleration. For example, import growth tapered off more than expected to 19% in June, versus 28% in May.

Don’t forget the lags in monetary policy
Keep in mind there are lags between changes in monetary policy and the impact on the economy. Historically, they range from 6 to 18 months.

So the Chinese economy is slowing down yet it will still be subject for the next 12 months to the dampening effect of previous monetary tightening. A hard landing may not occur but the odds seem to be on the rise.