376. The China Fed and its games

Reuters article re how China is trying to curb inflation while keeping the yuan as low as possible and making more money available to small businesses gives you an insight of China's "Federal Reserve." Like our Federal Reserve, China has many spigots to open to manipulate the economy. They can't just CREATE more money, because it would lower the yuan when you want to raise it to fight inflation or keep it in check by keeping it where it is. They also don't want to see the yuan increase because it hurts their exports even more (higher currency hurts exports, and therefore revenues, and therefore economy). So, how to you create more money for the small businesses that already have gone to loan sharks to get capital to stay afloat? You manipulate the reserves banks hold. If you lower the reserve requirements, they then have more money to loan to the small businesses (OR INVEST themselves). What will they do with the extra, now freed, reserve money? We shall see, because this is what they will continue to do in 2012. I don't believe this will abate inflation, but IF the banks free enough reserves to loan AND they do loan it out, the economy might get a boost from small business growth and job growth. More revenue from inside China might occur. I believe their goal is to get consumers to buy more of their own products. That would raise revenues as would a lower yuan that drives more exports would. China looks like a flat country  re economy growth in 2012. But, with the large cities being build up INDUSTRIALLY, they need to get people living and consuming within them now. Can't ask people to move in without giving them $$ (increase jobs, salaries) to sustain life. Tricky business. Of course, China has done this a different way: make every young individual enlist in the military. I might lighten up on emerging markets in 2012. Need to do more analysis.