1/5
A moderate increase in China's CPI inflation would in some ways be a good sign because it would suggest that consumption was rising faster than production, which might in turn imply a rebalancing of income towards middle-class households and workers.
scmp.com/economy/china-…
A moderate increase in China's CPI inflation would in some ways be a good sign because it would suggest that consumption was rising faster than production, which might in turn imply a rebalancing of income towards middle-class households and workers.
scmp.com/economy/china-…
2/5
But it would leave the PBoC with a difficult policy choice. If the PBoC were to prevent interest rates from rising in line with the increase in inflation, it would in effect be engineering an income transfer from ordinary households (by reducing the value of their...
But it would leave the PBoC with a difficult policy choice. If the PBoC were to prevent interest rates from rising in line with the increase in inflation, it would in effect be engineering an income transfer from ordinary households (by reducing the value of their...
3/5
savings) to banks or to borrowers, i.e. businesses and government entities. This would not only reverse the rebalancing process, but by lowering the real cost of borrowing it would encourage more rising debt, asset-price bubbles, and the further misallocation of investment.
savings) to banks or to borrowers, i.e. businesses and government entities. This would not only reverse the rebalancing process, but by lowering the real cost of borrowing it would encourage more rising debt, asset-price bubbles, and the further misallocation of investment.
4/5
But if the PBoC raised interest rates in line with the increase in inflation, this would shorten the duration of existing debt and increase repayment pressures for China's most-heavily-indebted businesses and provincial governments – along, probably, with defaults.
But if the PBoC raised interest rates in line with the increase in inflation, this would shorten the duration of existing debt and increase repayment pressures for China's most-heavily-indebted businesses and provincial governments – along, probably, with defaults.
5/5
Of course the more leveraged the economy, the more destabilizing an increase in nominal interest rates becomes.
Of course the more leveraged the economy, the more destabilizing an increase in nominal interest rates becomes.
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