* China - over the last few days, there has been much press about China's attempts to cut back on the easy credit provided to the nation's banks. This has been coming in the form of slightly higher interest rates, and higher reserve requirements. In turn, this has helped contribute to a downward shift in Asian and the world stock markets. This is important because China has a very robust economy which seems to be growing despite the general malaise in the rest of the world. Even though China's economy is one third the size of the US's economy, its money supply is greater than the US's. Take a look at these figures. I have converted everything into $ equivalents, and the %age change represents a 1 yr change in these measures:

Money Supply:                      China            US
M1 (Cash & Checking accts)      $3.2 T + 32%     $1.7 T  +6%
M2 (M1 + near cash assets)      $8.9 T + 27%     $8.5 T  +3% 

Given the amount of money which China has put into circulation, to support an economy 1/3 of our size, it should be no surprise that property values are rising in China, with the most recent readings for December showing a 7% increase in just one month.

The reality is that the proliferation in the US's money supply and the huge build-up of foreign exchange reserves in China has been fueling economic growth which has been averaging around 10% in China. Unlike the US, in China, a change in the money supply has positive multiplier effect on the growth of the economy. Accordingly, attempts to increase bank's reserve ratios to total lending, and the interest rates charged on money, should have a corresponding impact on loan growth. And so it is with China, that investors are concerned that attempts to pull in the reigns of the economy will remove this engine of growth. 

As the Chinese economy continues to grow, the hopes are that China will convert their economy from an export driven economy to one which consumes products from the rest of the world. At the end of the day, it is a zero net sum game, and in order for one country to gain exports, another country has to run a trade deficit. As the developing countries grow their industries, organic growth and consumption in these countries, with a large share of the world's populations are going to have to support the growth in their own economies.

When we hear stories about how the Chinese Central Bank is acting to slow the growth of money, or raise the rate on local currency deposits, it brings to mind the idea that the Chinese economy will slow down a bit, and that the largess of the economic stimulus applied over the last year is going to be pulled in. If you buy into the idea that withdrawal of stimulus has fueled asset markets over the past year, then it also suggests that asset markets are due for a correction. I agree.

Should we in the US, be bothered by Chinese attempts to reign in their economy? I am mixed on the subject. What I find most interesting however is the phenonemom by which the Chinese have managed to expand their local money supply. By virtue of the fact that the Chinese have over $2 trillion of currency reserves, it makes sense that they could print local currency in that amount. If the world was on a gold standard, then the Chinese would have converted their dollar surpluses into gold, and then would have the right to print money backed by that gold. In turn, this would produce local inflation in the Chinese economy. Then the US would have to reduce their currency in circulation as the gold left the US. In turn, this would cause prices and wages in the US to drop, giving the US an advantage as an exporter. With a reversal in trade imports/exports, the flow of currency exchangewould reverse.

Yet none of this is happening. This is because the US is off the gold standard. This results in US money printing operations, over the last 25 years, with trade deficits approaching $9 trillion to date. This is resulting in inflation in countries which are running trade surpluses, such as China. In the 1980s, I am sure the US's deficits with Japan, helped contribute to their property bubble. Accordingly, it is not surprising that China is experiencing inflation today. I am not sure where this is taking me, but with all the chatter about China, I wanted to broach the topic. More on this in the days ahead.