Friday 23 October 2015

Some concerns about the Chinese rate cutting

I think within the Chinese economy, many investors have money in their hands, but because of lack of opportunities, the money held by these investors does not have a place to spend. Cutting interest rates make borrowing cheaper, in order to put more money in the economy circulation. I want to describe the Chinese economy as a water tube. There is water inside the tube, but a plug blocks the tube. If we pump more water into the tube, we might have a strong water flow to push out the plug, or the water might make the tube burst. Cutting interest rates will affect people’s consumption, especially consumptions in housing and cars. Increase in consumption could lead to an increase in investment opportunities. However, there is one case that might lead to a hyperinflation. In this case, at the start, all investors see the increase in consumption and decide to wait a bit longer. At one point, all investors see their opportunities' coming and decide to put all their money into the game. Then the sudden increase in the amount of money in the economy could lead to an unexpectedly high inflation. I think the institutions are willing to make investments, but lack opportunities. The best solution is to create opportunities.Cutting rates is usually used to increase investors’ incentives to invest.

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