THE People's Bank of China's move to reduce reserve-requirement ratio is its second reduction this year, and the largest since November 2008 ("China to cut banks' reserve ratio from today"; April 20).
The cut comes amid steep drops in land and housing prices, excess industrial capacity, huge debt and capital outflows.
Can the monetary easing prevent an imminent hard landing?
In my view, it is too late for China.
Between 2000 and 2010, land prices escalated around 800 per cent, while housing prices jumped about 140 per cent.
These astrologically high levels are unsustainable, when compared with wage increases.
If house prices are to be held at their current levels, debt levels will have to keep rising.
That puts a continuing downward pressure on interest rates, which further boosts the price of houses. If the bank keeps cutting interest rates, it could cause inflation rates to rise.
Lowering the interest rates and flooding the banking system with easy money cannot stop property prices from crashing and leading to an economic meltdown.
These measures, however, can delay the onset of the meltdown.
Land prices peaked early this year, resulting in building activity stalling. This is a key indicator of an impending economic crisis, which could occur within the next two to three years.
Bust will follow boom, as history teaches us.
The pertinent question is how China's crisis will impact the health of both China and the world economy, and when.
Wong Toon Tuan
