Gerard Lyons has an article in the FT about Chinese monetary tightening. His conclusion is:
China has to tighten sharply. Last year, authorities held back, given growth concerns. The economy’s recent momentum seems to be strengthening their resolve. Expect further loan quotas, rising bank reserve ratios, sharply higher interest rates, targeted property taxes and likely steeper currency appreciation than expectations. Tuesday’s rate increase is a sign of things to come.
This is at odds with my view that the Chinese will tighten limply, not sharply. Lyons’ argument seems to be that because China needs to tighten sharply, it will. But he himself says that China has a “gradualist” approach to policy. He also makes reference to China’s “need to rebalance its economy” away from investment and towards consumption, before pointing out that the “domestic imbalance has not improved in the last two years” — a good example of how the Chinese do not necessarily do things they need to do. All this seems at odds with the idea that the Chinese will have a sharp tightening, and consistent with my conjecture that the Chinese government only thinks one move ahead.
It takes a lot to kill a leveraged boom. You can fiddle around with tax incentives and so on, but the boom will find new ways to carry on — see the Bloomberg story this morning about Chinese developers moving inland. Also, local governments have a strong incentive to continue to sell off their (or rather, the poor’s) land and encourage the building boom to continue. I therefore agree that China needs to tighten sharply; but I do not think it will.