The Curious Case of Chinese Monetary Policy

Tighter money, not looser.

Photo by Alexander F. Yuan - Pool/Getty Images

There are two big stories emerging out of China this month. One is that China’s real GDP growth rate, though still very high by rich country standards, continues to slow. The other is of continued concern about shadow banking in China and an apparent explosion in credit.

The latter if often taken to be an indication of loose monetary policy in China. But note that not only is real growth slowing, but inflation is also trending downward. It’s a mistake to get too hung up on terminology, but any time you have a situation in which both inflation and real growth are slowing it’s pretty hard to see loose money as a major factor. Whatever’s going on in the Chinese banking sector, actual monetary conditions are becoming more stringent and they have been for several years now. The government is trying to put NGDP growth on a slower overall trajectory, probably for some pretty good reasons, and the slowing of real growth is at least in part a consequence of that.