Monetary Policy As Asset-Bubble Management

China is still lending its way towards its 8% growth target for the year. Third-quarter growth has come in at 8.9%, with the National Bureau of Statistics (via Xinhua) pointing up strong fixed-asset investment and rising domestic demand offsetting the drop in exports. The economy expanded by 7.7% over the first nine months. M2, the broadest measure of money supply, rose 29.3%  in the first nine months. The banking system has turned on a fire hose of new loans, a record 8.65 trillion yuan ($1.3 trillion), which has pushed up fixed-asset investment by 33.4% in the first three quarters. A lot of that liquidity has flowed into stock, property and commodity markets. How measured the People’s Bank of China is in turning down its fire hose will determine how smooth an exit the economy makes from its stimulus program. As for all central banks, finding an acceptable mix of financial stability, growth and inflation as the global economy recovers from recession depends, in essence, on managing asset bubbles.

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