A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as RGE thinks it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but RGE suspects that the tightening moves have had little effect. As discussed in a recent RGE analysis, “ China: No Exit ,” which is available exclusively for RGE clients, China’s monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.

Read more here – RGE’s Wednesday Note: Still No Tightening in China