Tuesday, August 25, 2015

Moves Signal Inflation for China

Stocks were down sharply again today. After a 16 percent decline in two days, the central bank took steps to boost inflation with at 0.25 interest rate cut and a 0.50 percent cut in reserve requirements for banks.

There was other news (via Reuters). China will be tightening enforcement of existing capital controls, focusing especially on shadow banking:

China said it would launch a three-month crackdown on underground banking to curb money-laundering and illegal funds transfers as unstable markets stoke fears of capital flight.

Combined, the moves point to inflation ahead for China as authorities try to stabilize the economy and the stock market. Inflation is the right move, but it is not without problems. Inflation is fundamentally unfavorable for investors and will reduce foreign investment in facilities in China. There is a risk that an easy-money approach leads to more speculation, whether in the stock market or elsewhere. It will be a difficult tightrope to walk.

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