China’s GDP grew by 7.9% in the second quarter, buoyed by “extremely loose” monetary policy that has boosted investment growth to uncomfortably high levels. The economic growth promoted by investment alone looks likely to add to both imbalances in internal demand and pressures for economic adjustment in the future.
A glut of cash is producing bubbles in the Chinese economy. The racing credit growth and the low costs for wholesale financing are leading to financing abuses and production surpluses in the real economy. Even lower than usual interest rates have residents transferring their asset preference from bank deposits to the capital market, promoting frothy asset prices.
