If China is Worried About Losing Jobs Why Is Its Central Bank Raising Reserve Requirements?

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Saturday, 20 November 2010 08:57

The NYT reports that China's central bank is raising the reserve requirements for banks. It claims that this is being done to give the central bank more money with which to buy dollars in international currency markets, which will keep the yuan from rising.

The article claims that China does not want the yuan to rise because a higher yuan would make its exports less competitive and therefore cost jobs. However, raising reserve requirements will reduce lending, thereby also throwing people out of jobs.

The article also says that China is worried about inflation. If this is true, then the most obvious way to reduce inflationary pressure would be to just let the yuan rise. This would make imports cheaper and also slow growth by reducing exports.

The actions of China's central bank is inconsistent with the motives attributed to it in this article. Either those governing China's central bank are confused about basic economics or the article has inaccurately presented the motives for its actions.