The first China interest rate hike since 2007 caught analysts by surprise and knocked the world’s markets off-kilter. No official govt statement accompanied the move, however most economists agree that China’s exploding economic climate is feeding inflation that a rate of interest hike is expected to keep in check. Markets in Europe and also the United States of America 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.
The China interest rate increase
One year lending and deposit rates are increasing .25 percent points with the China rate of interest increase. These are also known as basis points that are being raised. The Chinese government is really dependent on exports and excess investment when rising cost of living continues to be something that cannot be controlled. The NY Times explains that this is exactly what the China rate increase shows clearly. The renminbi is the Chinese currency. The value of its currency is something economists have suggested ought to be done in order to stop rising cost of living from happening when also increasing imports coming in. The concern the Chinese govt has is that tens of millions of export jobs can be lost if the renminbi went up. Instead, it hopes the China rate hike will slow growth, get lending under ! control and encourage saving.
China’s overheating economy
In 2008, china had been pushed out of the global financial crisis since there was more lending from state run financial institution while a stimulus package had been pushed. The western economy has just sat without moving when the Chinese economic climate keeps expanding, accounts Cable News Network. China’s gross domestic product grew at a 10.3 percent annual rate within the second quarter. In the United States of America, that same figure was only 1.7 percent. Wages, food prices and real estate values have gone up a lot in China due to this. There had been an increase in China in consumer prices of 3.5 percent. This occurred because of the 7.5 percent boost in food prices in August. Real estate prices rose 9.1 percent compared to a year ago in China’s largest cities.
China’s rate hike is not going to work
Raising interest rates is typical when central banks want to check inflation. Business Insider’s Michael Pettis said that the rising cost of living rate could possibly be set off by the China increase of 25 basis points. China is known for the super low interest rates it has. This is why a small boost is going to make a huge difference. Based on Pettis, the China rate hike might hurt China. This would be because the nation focuses on excess investment which would be hard to do anymore. In 2012, the communist leadership change could happen in China. This is unlikely although it’s something China needs.
Citations
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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