China’s monetary muddle

Overview

The recent rise in Chinese inflation has turned real interest rates on deposits strongly negative, spurring an exodus of household deposits from banks. Although nominal deposit rates have been pushed up by a total 135 bps so far this year, the rise in inflation has far outstripped these hikes. Rather than raise deposit rates more aggressively, the People’s Bank of China is rolling out a series of administrative measures to deflate an expanding domestic liquidity bubble. These...