JUDGING by its stockmarket, China is awash in cash. Trading is so frenetic that on April 20th, volumes surpassed the limits of the software that tracks transactions. More than 1.1 trillion yuan ($180 billion) of shares swapped hands that day, but the Shanghai Stock Exchange’s counter remained stuck at 999.99 billion. It is only a matter of time before this happens again. Investors are opening more than a million new trading accounts every week, chasing returns on a market that has doubled over the past year.
Despite this frenzy, the central bank acted this week to pump money into the financial system. By cutting the portion of deposits that banks must hold as reserves, it freed some 1.3 trillion yuan for new lending. Why inject cash when the stockmarket suggests China is not short of capital?
To be fair, the People’s Bank of China (PBOC) does not target the stockmarket. Its mandate is twofold: to keep prices stable and to support economic growth. On both those counts, loosening monetary policy is the right call. The GDP deflator, a broad measure of inflation, slipped into negative territory in the first quarter, falling by 1.1% from a...
from The Economist: Finance and economics http://ift.tt/1FgOQgd
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