Can't do it all

China: As surprises go, it was pretty modest. But the latest tweak in China’s monetary policy is a sign of a serious trilemma.

On Friday, the eve of the long Chinese New Year holiday, the People’s Bank of China unexpectedly raised the reserve requirement, the proportion of bank deposits that must be placed at the central bank. The increase — a half percentage point to 16.5 per cent for big banks — was hardly draconian. And the shift, which takes effect on February 25, was at least in part a technical, post-holiday liquidity withdrawal.

Still, the People’s Bank has an unenviable task. The government wants it to keep inflation low, but that is proving hard. Monthly inflation in January was 1.5 per cent, and that was lower than in December. Urban house prices are up 9.5 per cent in a year, and bank loans made in January were equal to the total for the previous three months.

The reserve hike is typical of the central bank. It is a response, but a cautious one. Restraint in fighting inflation reflects the need not to get in the way of a second government goal: rapid GDP growth. A loosening of monetary policy helped compensate for the collapse of foreign demand at the end of 2008. GDP is once again growing at a double-digit percentage rate. Some of the newly released liquidity has gone to increase prices, but much of it spurred additional production of goods and services.

Of course, the People’s Bank could consider the prescription of Western governments: a revaluation of the yuan. That could restrain inflation by making imports cheaper, and it might not hurt economic growth. But it would probably make labour-intensive exporters less competitive, causing job losses. That would conflict with the government's third policy goal: steady job creation. Any increase in unemployment is considered politically as well as economically dangerous for China’s single-party regime.

Three may be too many goals for any government to juggle, even one that controls the exchange rate, most of the banking system and much of industry. Something has to give. Despite the latest central bank move, a dose of inflation may turn out to be less objectionable than weak growth or lost jobs.