China tries something new with its economy

Hmm, below is an article on China trying to slow it's own economy down.  The boom in construction spending is what seems to be driving the engine.  I doubt that increasing the reserve amount will do much to slow the economy, but who knows?  It might.   

Perhaps the more realistic worries could be over reaching of expansion of manufacturing facilities and not enough global demand to soak up all of the excess.

...

http://www.philly.com/mld/inquirer/business/15096213.htm

China moves to rein in economy
Beijing tightened credit to slow lending, and let its currency hit a new high against the dollar.
Associated Press

BEIJING - China took action yesterday to cool its sizzling economy, tightening bank credit to stop frenzied lending and letting the Chinese currency hit a new high against the dollar.

The move by Beijing followed this week's announcement that the economy surged 11.3 percent in the second quarter, its highest rate in a decade, from a construction boom and robust exports. Economists and officials worry that rapid growth could cause inflation or dangerously high debt.

The central bank raised the amount of money that most banks must deposit with the government by half a percentage point to 8.5 percent of their deposits as of Aug. 15, reducing the amount available for lending.

Meanwhile, China's currency strengthened to 7.9815 yuan to the U.S. dollar, its highest level since the government revalued the yuan and cut its peg to the dollar exactly a year ago, allowing it to trade in a restricted range. Since then, the yuan has risen just 1.6 percent against the U.S. dollar.

Financial analysts had expected Beijing to act to restrain the economy. Tightening credit should help dampen investment in real estate, factories, and other fixed assets that is underpinning the boom. At the same time, a stronger yuan might rein in growth by making Chinese goods more expensive and slowing exports.

Ineffective so far

But government efforts to slow the economy have so far proved ineffective. Yesterday's raising of the reserve requirement was the second time the central bank ordered an increase. And in April, the central bank raised a key lending rate 27 basis points, or hundredths of a percent, to 5.85 percent.

China's banks have overshot lending targets this year, handing out $275 billion in the first half, or 90 percent of their goal for all of 2006, the government says.

The boom in exports, which rose 25.2 percent in the first half of the year, lends strength to arguments by Washington and other trading partners that China's currency is undervalued and that Beijing should relax its grip on the yuan's value.

Chinese officials say they plan eventually to let the yuan trade freely on world markets but reject demands for a sharp increase in the exchange rate.

And in Washington yesterday, the Bush administration made a conciliatory move regarding China and its business practices. Citing evidence of progress by China to improve labor rights, it announced it had rejected a petition to begin a trade investigation into Chinese labor practices.

AFL-CIO filed request

The decision turned down a request filed in June by the AFL-CIO and two members of Congress who contended that the Chinese were violating international labor standards and costing 1.24 million American jobs.

In a statement issued by the office of U.S. Trade Representative Susan Schwab, the administration said engagement with China was producing evidence that labor conditions were improving in China and that launching a trade investigation was not the best way to proceed.

The petition was an effort by labor groups in an election year to turn up the heat on the administration over record trade deficits the United States is running with China, which hit an all-time high of $202 billion last year.

"We are disappointed, but not surprised," said Thea Lee, policy director at the AFL-CIO.

But Sean Spicer, a spokesman for Schwab, said investigating China's labor practices, under a provision of U.S. trade law known as Section 301, would "neither shed more light on this problem nor lead to a more effective approach for addressing Chinese workers' rights and labor conditions."

The AFL-CIO was joined in the petition request by Rep. Benjamin Cardin of Maryland, the top Democrat on the Ways and Means trade subcommittee, and by Rep. Christopher Smith (R., N.J.), a strong critic of China's human rights record.