For a fast growing economy, more properly put some money in order to adequate and stable funding to support the development, is necessary. In general, credit expansion over the past few years to support the rapid economic development over the Chinese economy was a new level. The global financial crisis, banks in time of credit expansion policy, making China the first recovery of a major economy.

However, all things are degrees too far. See the number of credit expansion from these years far exceeded the scale necessary to support growth, the duration from the credit expansion policy perspective, the operation of a long time far more than the required counter-cyclical policies. China’s current total loans / GDP ratio has been substantially more than the Japanese bubble of the eighties of last century and this century, Greenspan bubble highs.

Not pose a threat of inflation before the monetary policy bias may be acceptable. But the People’s Bank on the inflation outlook in the past two years appears to be two blind. First, the resurgence of inflation, lack of preparation in 2006-07. Inflation fell last round of policy measures are not effective (of course, somewhat lower prices of agricultural products), but was interrupted by the subprime mortgage crisis, the central bank does not seem to realize that manufacturing remains a hotbed of inflation; the second is the inflation of assets held in intervention is not chess go. With globalization and changes in production methods, manufacturing inflation quickly disappear, worldwide consumer inflation down the central axis of the phenomenon appeared, replaced by asset inflation. Asset prices are too high, not the traditional areas of central bank intervention, but it also may lead to an imbalance of economic operation, trigger a financial risk. In addition, China’s CPI index itself also has design flaws, so that index can not reflect the actual inflation situation.

Lehman Brothers collapse triggered the financial crisis, the Chinese government policy of the kind of extraordinary expansion, after all, under the emergency measures of distress, should not become the new norm. I believe that normalization of the central bank in the monetary environment, the moves too late, shooting too light, so a few years of excess liquidity accumulated fermentation damage, the recent monetary policy, a major misstep is the key reason why the resurgence of inflation. Current inflation, agriculture and loss of income, wages and other factors, but I see the back of soaring soar, not primarily supply and demand imbalance, but the liquidity imbalance. Too much hot money chasing limited assets, the results of garlic, green beans, apples, cotton, just a few kilometers to heaven. China’s housing market is over-supply of those years, can be sold in mid-rise housing stock, but this did not prevent prices soaring. Conversely if there is no increase in mobility (including the acceleration of turnover), individual products in short supply, will only lead to the rise in commodity prices, relative prices of other products to fall, the overall price level should not change. China’s inflation problem, there is a liquidity problem is monetary phenomenon.

Accumulate over the years under the liquidity, in part from the active monetary policy, partly from a passive exchange rate policy. China became the world factory. Current account surplus of the explosive growth, while foreign capital influx. Under normal circumstances, the general equilibrium theory, the RMB exchange rate needs to be adjusted. However, there is no significant adjustment of the RMB exchange rate, the result is skyrocketing foreign exchange reserves on the one hand, on the other hand internal liquidity boom, the rise in both the economic needs are far beyond even the normal tolerance range. For foreign exchange, central bank claims to have its hedging, but from the actual situation, at least half of the excess liquidity and the RMB exchange rate policy. Down through the distortion of the exchange rate to maintain export competitiveness, not only in energy consumption, environmental pollution brought about consequences, but also caused the imbalance of macro monetary conditions.

Awash with liquidity, but also led to speculation of assets. Shanghai housing prices has been close to Tokyo, and Shanghai’s per capita income of less than a quarter of Tokyo. Daily turnover of China’s stock market, other markets than the sum of the Asia-Pacific (including Japan, Korea, Taiwan, Hong Kong, Australia, Singapore, etc.). In the normalization of monetary conditions, the central bank has accelerated the pace, but the choice of the policy is clearly inclined to the number of policy tools, to raise interest rates very carefully. Interest rates do not add pork to the rice, but not negative interest rate hike will not solve the situation. Inflation 4.4%, while the one-year deposit rate is only 2.5%, the savings were in fact legitimate robbery, capital fled the housing market, the stock market is a rational move. But this will only further distort the price signals to create a mismatch of resources may ultimately lead to greater losses to the economy, as laid a huge financial risk.

Another problem on the road to normalization is indecisive, the pace not too fast, so that excess liquidity, long-term maintenance of low interest rates to stimulate the asset bubble inflation. What is more worrying is that private investment this year, almost complete cessation of the industrial investment, private entrepreneurs keen on PE investment, to make quick money through the capital game.

Excess liquidity in the seeds of future economic turbulence, the root cause of financial instability and may even bring out the hidden dangers of social stability. It is a comprehensive review of the monetary policy framework, objectives, tools and time to select the right is the full and accelerated normalization of monetary conditions the time.

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