The first China interest rate increase since 2007 caught analysts by unexpected and knocked the world’s markets off-kilter. Unlike common practice at the Fed for such moves, the Chinese govt did not provide a statement justifying the increase. However, economists say it is obvious that China is coming to grips with the inflationary consequences of a rapidly expanding economy. Markets in Europe and the United States Were down on the news as investors feared a Chinese slowdown will hinder global recovery. However, some say those concerns are unfounded because China wants to keep its economic climate humming when it prepares for a communist leadership transition in 2012.
Exactly what the China rate of interest actually is
The China interest rate increase raises benchmark one-year lending and deposit rates by .25 percentage points, also known as basis points. Based on the NY Times, the Chinese govt is certainly having a difficult time controlling inflation as shown in the China hike with the housing prices going up while there is also an economic climate that is very dependent upon excess investment and exports. China is being encouraged by economists to increase imports and fight rising cost of living by raising the value of its currency, the renminbi. If the renminbi went up in value, tens of millions of export positions could possibly be lost. This is the biggest concern for the Chinese government. All growth will hopefully be slowed for them. This will be done with the China rate increase which may also encourage saving and help many get their lending under control.
Chinese economy is heating up a bunch
A huge economic stimulus package and aggressive lending by state-run banks pushed China out of the global financial crisis in 2008. CNN accounts that since then, the Chinese economic climate has expanded rapidly when western economies remain sluggish. Within the second quarter, China’s gross domestic product grew at a 10.3 percent annual cost. Within the United States of America, that exact same figure was only 1.7 percent. China’s exploding GDP has lead to soaring wages, food prices and real estate values. There had been a rise in China in consumer prices of 3.5 percent. This occurred because of the 7.5 percent increase in food prices in August. Real estate prices rose 9.1 percent compared to a year ago in China’s largest cities.
China’s fee hike is not going to work
Raising interest rates is typical when central banks want to check rising cost of living. However, Michael Pettis at Business Insider said the China rate increase of 25 basis points is too little to offset its rising cost of living rate. Just a small boost in rates of interest is likely to hurt in China since the economy is used to the super low rates of interest. Based on Pettis, the China rate hike might hurt China. This would be as the country focuses on excess investment which would be hard to do anymore. In 2012, the communist leadership change could occur in China. This is unlikely even though it’s something China needs.
Articles cited
New York Times
nytimes.com/2010/10/20/business/global/20yuan.html?_r=1 and src=busln
CNN Money
money.cnn.com/2010/10/19/news/international/china_rates/
Business Insider
businessinsider.com/michael-pettis-pboc-rate-hike-2010-10
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