China Review News published a commentary stating that, though China’s loose monetary policy quickly stimulated the economy, its residual effect has been to dampen China’s economy. First, a huge amount of loans has built up inflation pressure. The CPI has kept increasing since the fourth quarter of 2010; it reached a peak of 6.4% in June 2011. Since 2010, the People’s Bank of China has been forced to raise the deposit reserve ratio 12 times and the interest rate 4 times. This credit tightening causes economic growth to slow down. The unemployment rate may shoot up as small-and-mid-level businesses face challenging times to get loans.
Second, in 2008, by issuing bonds, local governments financed 70% of the government’s 4 trillion yuan ($US600 billion) stimulus package. By the end of 2010, local government’s debts had jumped to 10.7 trillion yuan ($US1.6 trillion). Local government’s inability to pay back the loans will hurt banks. The large local government debts also hinder the central bank’s ability to fight inflation, as higher interest rates makes it harder for local governments to pay back their loans.
Third, China’s efforts to cool down the overheated real estate market will hurt construction and other real estate related industries.
China Review News, August 3, 2011