The China’s combat with growing inflation

China avoided the financial crisis associated with the toxic Western debts, and it has huge reserves generated from trade and capital inflows' surpluses. Thus, is China unbeatable with the control of its capital flows and protected domestic markets?

Despite the strong domination China tackles with the domestic economy overheating and the threat of the growing inflation. So, how the decisions to delay the rise of interest rate and increase in banks' reserves requirements could smooth economic growth?

Higher interest rates usually attract capital inflows and increase amounts of deposits held in banks. Thus, in growing economy conditions when the demand for borrowing is high banks have great incentives to multiply the supply of money that most often leads to even higher inflation. Meanwhile, the increased banks’ reserve requirements should reduce the liquidity and banks’ plans for borrowing.

Moreover, the choice to use additional means such as open markets operations or changed discount policies for commercial banks' short term borrowing from the People’s Bank of China most likely would be better options than considerations regarding the increase of interest rates.