Monday, August 4, 2008
China is in favor of pro-growth policy
Moves last week were in favor of the pro-growth camp: banks' lending quots were lifted by 5% while textile manufacturers won additional tax breaks. Lowering the guarda against inflation is premature. Regardless of the upward pressure on inputs costs, manufacturers will struggle to raise export prices as long as there is overcapacity in the system. The real culprit is from money supply. Witness the $130 bil of foreign exchagne reserves accumulated in the three months to the end of June, well in excess of the trade surplus and foreign direct investment. Companies can also turn to corporate bonds market, whcih has raised almost $30 bil so far this year. The risk is to futhre stoke inflation.