China cuts reserve requirements: is it too late?

This graph comes from a BIS working paper: China’s evolving reserve requirements. I highlighted an important portion from the abstract as it relates to the cut in the reserve requirement:
This paper examines the evolving role of reserve requirements as a policy tool in China. Since 2007, the Chinese central bank (PBC) has relied more on this tool to withdraw domestic liquidity surpluses, as a cheaper substitute for open-market operation instruments in this period of rapid FX accumulation. China’s reserve requirement system has also become more complex and been used to address a range of other policy objectives, not least being macroeconomic management, financial stability and credit policy. The preference for using reserve requirements reflects the size of China’s FX sterilisation task and the associated cost considerations, a quantity-oriented monetary policy framework challenged to reconcile policy dilemmas and tactical considerations. The PBC often finds it easier to reach consensus over reserve requirement decisions than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored in conjunction with other policy actions and not in isolation. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. There are, however, costs to using this policy tool, as it imposes a tax burden on Chinese banks that in turn appear to have passed a significant portion of this cost onto their customers, mostly depositors and SMEs. However, the pass-through onto bank customers appears to be partial
Consider the highlighted sentence in light of the following articles, all from the previous week:

FDI drops over EU debt crisis
Foreign direct investment dropped for the third straight month in January as European investment plunged by 42 percent from a year earlier. The slump in European investment was instrumental in causing a slight fall of 0.3 percent in FDI.

The drop prompted a warning from the Ministry of Commerce over the "grim" outlook for FDI.

China's Forex reserves likely to decline this year: Report
Chinese forex reserves will continue to decrease in 2012, Lian Ping, chief economist at Chinese Bank of Communications, said.

China's economy is no longer as heating as in the past, and that is the main reason among others why Chinese exchange reserves are dwindling, he said.

Chinese Banks’ Bad Loans Rise in Fourth Quarter as Economy Slows
Non-performing loans rose 20.1 billion yuan ($3.2 billion) to 427.9 billion yuan as of Dec. 31, the China Banking Regulatory Commission said in a report on its website today. Bad loans accounted for 0.96 percent of total lending, up from 0.95 percent in September and 0.17 percentage point lower than a year earlier.

In China aims for 14% M2 growth; M2 growth hit 17% in December, I showed money supply growth is still in a multi-year downtrend, but remains in the high double digits. I discussed China's dilemma in a December 2010 post, Larry Meyer echoes Liu Junluo:
For many countries, it may be too late, particularly in the case of China. They should have started moving away from exports years ago and let their currency appreciate more rapidly, and now they are caught in a bind. If they do not allow the currency to appreciate, inflation may quickly surge into the double digits. Once that happens, they must take drastic action, but even if they act to stop the inflation, it may be too late to prevent a deflationary bust in the real estate market (especially in China) or other asset markets.

Federal Reserve policy is likely to create a crack-up inflationary boom that leads to another Asian Crisis and the actions taken by Asian governments and central banks will also lead to deflation.
China's policy mistake, if a major crisis erupts, was to delay restructuring. Without a positive shock to the economy, the government and central bank are caught between the Scylla and Charybdis of major inflation or deflation. In order to stop inflation generated by the Fed's QE policies and slow the internally fueled real estate bubble, the PBOC tightened and the central government clamped down on real estate. Deflation is now settling in. The big question is how bad is the real estate slowdown? If the optimists are right, the sector will stabilize in the second half and central bank easing will help spur growth to offset negative shocks. If it's bad, the PBOC is behind the curve and more serious deflation will follow. Then the money spigots will open and we'll really see some inflation accompanied by currency depreciation (unlike the brief dip in late 2011). Then we may see a China gold frenzy that puts the past two years to shame.

On the subject of hyperinflation, in September 2011, I posted Liu Jun Luo: Six to ten months until Chinese hyperinflation. Liu argued for a policy of wage inflation, using the war analogy of taking losses to slow the enemy. By raising wages and accelerating domestic inflation, the government would kill the export sector but support the rest of the economy—and crucially protect the exchange rate. Otherwise, Liu argued negative economic shocks from Europe and the U.S. would lead to serious deflation and then money printing, which would cause hyperinflation fueled by exchange rate collapse.

Liu has been talking about hyperinflation for awhile. He targeted 2012-2013 as the years for hyperinflation in China. This post of his is from March 2010:2012年——2013年中国恶性通货膨胀. He also expected (still expects) a gold market crash: Liu Junluo: Gold crash coming. He saw a gold bubble in China, but it has only grown much larger in 2012. If he's right about hyperinflation, gold may do well priced in yuan, but the decline in global growth would be deflationary. Commodity exporting nations and commodities would be hit hard, taking gold with them at least temporarily (similar to 2008). During this period, Chinese may prefer dollars to gold, an action that would lead to the type of currency collapse he predicts.

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