The result will be an economic hangover, the intensity of which will be determined by the extent of the country's monetary binge. The inevitable monetary squeeze saw output fall, unemployment rise and the rate of inflation fall, with the rpi reaching 7.7 per cent last April. So having barely recovered from one binge, the government now embarks on another by cutting interest rates. It appears that a 2.5 per cent fall in consumption combined with rising unemployment and a 50 per cent increase in losses by state companies motivated the government to slacken the monetary reins. This decision was debated at meeting in Beidaihe.
Subsequent leaks suggest that the decision exceeded the central bank's more conservative proposal.
It seems that some officials are not only disturbed at the inflationary consequences of premature rate cuts but also their discriminatory structure. I'm not surprised. The size and structure of the cuts have been welcomed by many commentators as stimulating both consumption and investment. This is paranoid. Therefore any policy that stimulates consumption must reduce the rate of investment and vice versa.