G20 Policy Challenge

The policy that has been enforced by Premier Wen Jiabao to restrain the yuan from expanding has seen reserves increase by $1 trillion over a period of two years due to the growth in the economy. In regard to loans being accessed, a report has shown the new loans have exceeded the estimated amount of $104 billion, or 679.4 billion yuan. Capital Economics Ltd economist in London, Mark Williams, commented: “Most striking at first sight is how fast the foreign-exchange reserves are rising. Chinese officials point to the first quarter’s trade deficit as evidence that there is less need for the renminbi rise, but the scale of reserve growth shows that the People’s Bank is still intervening very actively to keep the renminbi down.”

Officials in China are now trying their best to discourage loans, as decreasing the number of loans will assist in offsetting inflation. This is because banks have had to increase their interest rates due to the massive growth in loans that was experienced during the credit crises of 2009 and 2010 experienced worldwide. China is now working towards curbing inflation, while trying to ensure that the yuan does not ascend. Consumer prices have also been on the rise, and have seen escalations in prices of between 5.3 and 5.4 percent. Wen Jiabao spoke to the state council about the changes in the economy and financial fluctuations, stating: “We will further improve the yuan formation mechanism and increase yuan exchange-rate flexibility to eliminate monetary conditions that fuel inflation.”