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Chinese Bank Stirs World Markets

The Chinese hope that their central bank’s decisions to further tighten bank lending, in attempts to further restrain last year’s spending spree to stimulate their economy, will reign in the threat of serious inflation on assets which would create “dangerous asset bubbles.” Last year China’s economy grew in spite of a weak global economy because of government stimulated bank lending. This “spree of bank lending” was great for the economy last year but now with the amount of liquidity tied down and assets in play, inflation starts to take hold of the financial economy.

The Central Bank plans on accomplishing this reigning in of banks by requiring banks to increase their capital reserves from 16% to 16.5%. While world economists expected a move like this, they did not expect it so soon. Even though the announcement in Bejing was timed at 6 p.m. Friday, conveniently when the Shanghai’s exchange closed for the day and all this week to the Chinese New Year. Global markets have already taken note, especially since last time the Central Bank announced an increase in reserves the Shanghai index went down by 3%.

China’s strategic announcement at close of Firday though didn’t stop the news from affecting world markets and creating waves in various exchanges. This is due to the importance of China’s recovering economy in the macro-stage of the world economy’s credit fiasco of 07-08. Any signs of a problems in the Chinese economy could resonate through economies world-wide. This sounds true in economists predictions that China’s investment in growth might not pay out for years to come and crumple future profits. This crimp on future profits combined with the further straightened capital ratios might serve to further slow the ailing U.S. economy which is still involved in two wars arguably financed by the Bank of China.

Read more at WSJ.


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