Friday, November 07, 2003

My friend Matt Rudolph at Cornell sent me a report from Ma Jun at Deutsche Bank, which stated:

"Probably the PBOC has believed that the decline in money velocity is
now contributing more significantly to money demand

growth, and therefore 20% M2 growth would not seem

as threatening as just a few months ago."

Matt asked me: Do you think he mean diminished velocity reflects dampened money demand and therefore the M2 growth is less threatening?

My reply:
I think what Ma Jun said is reasonable. There is no immediate threat of inflation. This occurred in the mid-80s, whereby strong money growth was accompanied by pretty low inflation for a few years, but a sudden policy shock (price reform in 1988) could trigger heighten inflationary pressure. I suspect part of the reason that the PBOC is playing down the money growth issue is because they are under some political pressure to continue a relatively loose monetary environment. Of course, I would say that, wouldn’t I. I don’t think the PBOC’s stance would change, even if inflation was up to the 4% territory. Money velocity also might have declined because more and more bank loans are going toward long-term fixed asset loans, rather than short-term working capital loan. But the precise effect is yet unknown.

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