Chinese Foreign Currency Reserves Swell by Record Amount Article - 1

Chinese Foreign Currency Reserves Swell by Record Amount - Article Example However, this spawns another problem. The additional renminbi issued causes the money supply in the country to rise even further. What was not discussed in the article is the direct impact of the level of money supply on inflation. A high level of money supply circulating in the economy causes aggregate demand to rise. This increased demand for goods and services is what pushes general prices to go up. Looking at China’s foreign reserve levels, in the third quarter of 2010, it increased by $194 million. In the fourth quarter, it jumped by $199 million to raise the total to $2.85 trillion. This increase was much larger than what economists had expected. During this time, China â€Å"doubled its intervention in the currency markets to about $2 billion a day† (Bradsher, 2011). And so, the country’s money supply was 19.7 percent higher in December than a year earlier. The increase in money supply though is not solely due to the central bank’s efforts to keep the value of the renminbi in check. Banking loans have also risen and measures taken by the central bank to slow down lending, primarily by increasing bank reserve requirements have proven to be ineffective. Bradsher, K. (11 January 2011). Chinese foreign currency reserves swell by record amount. The New York Times. Retrieved 14 June 2011.