Wednesday, December 22, 2010

All China need to do is to ...

China does not need to raise their bank reserve ratio to drain the cash from the financial system. As of now, the bank reserve ratio is as high as 18.5% and the current interest rate is now 5.56%. In my opinion, the problem of China's liquidity is not with the interest rate and the bank reserve ratio.

The problem lies with the governance.Who is ensuring the banks are keeping to the reserve ratios? Who is ensuring that the funds that are lent out is in accordance to the set interest rate?

Personally to me, all China needs to do is to do a nationwide comprehensive audit, answerable to the President of China. The audit should ensure compliance to all the set regulations. Subsequently, quarterly audit should be done to ensure compliance. With this in place, they should get their intended result.

Will they do it?

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