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The People's Bank of China in Beijing

NG HAN GUAN

Anyone wondering what really loose monetary policy can accomplish need only glance at the latest double-digit growth numbers from China. The final tally for 2010: 10.3 per cent year over year. And forecasts indicate only a slight moderation in expansion in 2011 to between 9 and 10 per cent.

But we're talking about an artificially juiced economy, and the Chinese can't really afford to cut back much on the steroid injections without potentially triggering such undesirable consequences as higher unemployment and widespread social unrest, the fear that lurks in the shadows every time policy planners gather to map out the country's monetary and economic strategy.

The monetary strategy was simple in 2010: just keep pumping capital into the economy at an extraordinary rate and worry about the risks later. Beside the Chinese, Ben Bernanke's Fed looks like a tightwad.

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Despite half a dozen increases in bank reserve ratios, Chinese commercial lending totalled nearly 8-trillion yuan ($1.2-trillion U.S.) last year. That was down from 9.6-trillion in 2009, but far above the 4.9-trillion level in pre-crisis days. And in China, that simply could not happen without the government's approval.

Meanwhile, money supply has increased about 50 per cent since the crisis.

The consequence is bound to be increased inflationary pressures, although these have been held more or less in check on the non-food side of the consumer aisle by considerable excess capacity. (Food prices remain volatile and cyclical, driven by such factors as supply shortages and weather conditions, and subject to government intervention). But as long as Chinese officials remain timid about reining in monetary policy, the pressures will worsen. And as far as anyone can tell, strong economic growth fuelled by exports still seems to be the main game plan in Beijing.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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