China struggling to print enough money

2011-01-12 13:08

Beijing – China has the world’s largest money printing operation but still fails to meet demand for yuan, a central bank official said, amid rampant lending and a flood of foreign exchange into the country.

The remarks by vice governor Ma Delun, posted on the central bank website yesterday, highlight the challenges facing Beijing as it tries to control the value of its currency and reduce the volume of money flowing into the economy.

China employs more than 30 000 people to print money and offers them incentives to work extra hours to ensure there is enough yuan in circulation to match demand, which is growing by 20% a year, Ma said.

But it is not enough.

“The growth of yuan production capacity has failed to keep up with the pace of demand,” he said, adding that the central bank was also struggling to crack down on the increasingly sophisticated production of fake notes.

He gave no other details.

China had 4.23 trillion yuan (R4.38 trillion) in circulation – excluding bank deposits – at the end of November, up nearly 80% from the 2.4 trillion yuan washing around the economy at the end of 2005, he said.

That expansion in money supply coincided with surging demand for Chinese exports, growing foreign direct investment and massive government spending and bank lending during the global financial crisis.

Foreign currencies entering China are snapped up by the central bank in return for yuan, enabling authorities to control the value of the local unit.

The practice – criticised by trade partners for grossly undervaluing the currency – adds to China’s world-beating foreign exchange stockpile and increases the amount of yuan in the domestic economy, fuelling inflation.

Rather than let the yuan trade freely against the dollar, China has adopted other measures to stem the flood of liquidity into the economy which has pushed inflation to the highest level in more than two years.

The central bank in December raised interest rates for the second time in less than three months and has ordered banks to keep more money in reserve, effectively limiting the amount they can lend.

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