China’s monetary policy has been in focus in recent weeks after a surprise interest-rate hike by policymakers over the Christmas holiday. But concerns linger about the People’s Bank of China’s capacity to get ahead of rising price pressures, in part because high levels of poorly disclosed internal debt make it harder for Beijing policymakers to raise rates too much.
In China “the largest debtors and the largest borrowers in the banking system are state-owned entities and local government investment corporations,” says Northwestern University, professor Victor Shih. “Obviously the government doesn’t want to raise interest rates on itself.”…
Many experts aren’t expecting any immediate blow-up in the financial system. But they say that if monetary policy isn’t tightened sufficiently enough to hold down inflation, households and their consumption will come under pressure. High inflation tends to reduce the buying power of consumers, as well as the value of their savings. That, in turn, hurts economic growth.
Something doesn’t smell right to us and it looks like Chinese policymakers are in difficult spot. Our bias is increasing that their monetary policy dilemma, coupled with the country’s lack of transparency, is not fully priced into the commodity markets and certain emerging equity markets.