Monday, November 19, 2007

The Article in Question: China Tells Banks to Curb Lending Sources

The story, “China Tells Banks to Curb Lending Sources,” was published by the Boston Globe on November 19, 2007. The related headline story, “China Freezes Lending to Curb Investing Frenzy,” is published on the Wall Street Journal on November 19, 2007.

Statement from the Article (Boston Globe): “The Wall Street Journal on Monday cited banking and regulatory sources as saying that banks were being required to ensure that their outstanding loans at the end of the year did not exceed the level as of October 31.

An official at the China Banking Regulatory Commission (CBRC) denied that the agency had laid out such a specific target.

"No, no. We only require the banks to control lending reasonably," Lai Xiaomin, a spokesman for the CBRC, said of the newspaper's report. "We have not set fixed quotas for them."

My Opinion: “Isn’t it great to be an American!”

I cannot imagine a world where the fiscal sector regulates not only the reserves that banks hold on deposits, but also the amount in which the bank can loan out. Let’s think about this. In the last week, we have heard about the following:

1. Chinese price controls fail

2. Chinese inflation results

3. China regulating the amount of loans that banks can make to the public

I think that sometimes we take it for granted that we live in a Democratic State! Just think about living in China. First, the government sets widespread price controls in order to regulate inflation. From a retailers perspective, this is quite invasive –how does the government know better what price you should be charging? This inhibits the ability of businesses to make well-informed decisions (like how much to sell). Second, the government’s inability to curb inflation. As a consumer, imagine facing rising prices when you were under the impression that prices were regulated. This creates an uncertainty in the future that will impact consumption and demand for goods and services. Third, the government regulates the loans that the banks can give and implicitly the loans that consumers may acquire. This is a direct interference in the banking industry. The reduction in investment funds may curb inflation, but by limiting investment, future economic growth is also affected. If limiting economic growth is the Chinese government’s goal, then why not consider more direct policies? For example, let the nominal exchange rate appreciate, and at the same time, allow for market forces to drive the prices of goods and services. The real exchange rate falls (appreciates), and net-exports fall, resulting in lower inflation and curbed economic growth.

I am happy that my government does not interfere with my daily life like the Chinese government does with its people's lives. It is an unwise decision to inhibit investment. It directly lowers saving for, and production in, the future. Isn’t it great to be an American.

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