China Can't Tighten Credit Until The Rest Of The World Does

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Ambrose Evans-Pritchard has a must-read in the Telegraph based on discussions with Chinese ‘economic ambassador’ Cheng Siwei.

What Siwei will say (on the record, ominously — we’re left to wonder what he’s saying off the record) is that China really is losing confidence in the dollar, but that the country has little alternative, except to buy gold on the dips.

It’s going to be slow, and the country is loathe to buy too heavily, else it distorts the market more than it would like, but over time it will keep accumulating the shiny metal.

He also acknowledged the presence of a stock and housing bubble in China, but explained why the government would have such a hard time pricking it:

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now 10 times incomes.

“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

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