Economists and investors were surprised with China’s first rate of interest increase since 2007 on Tuesday. As opposed to common practice at the Fed for such moves, the Chinese government didn’t provide a statement justifying the increase. However, economists say it’s clear that China is coming to grips with the inflationary consequences of a rapidly expanding economic climate. Markets in Europe and also the U.S. Were down on the news as investors feared a Chinese slowdown will hinder global recovery. Nevertheless, some say those fears are unfounded because China wants to keep its economy humming when it prepares for a communist leadership transition in 2012.
What is China’s rate of interest?
One year lending and deposit rates are rising .25 percent points with the China interest rate increase. These are also known as basis points that are being raised. The Chinese govt is really dependent on exports and excess investment while rising cost of living continues to be something that cannot be controlled. The New York 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 should be done in order to stop inflation from taking place while also increasing imports coming in. The concern the Chinese govt has is that tens of millions of export jobs might be lost if the renminbi went up. Instead, it hopes the China rate hike will slow growth, get lending under control and en! courage saving.
The overheating economic climate of China
The government pushed a stimulus package on the country in 2009 during the global financial crisis leading to more lending in state run banks. This left China out of the whole thing. CNN reports that since then, the Chinese economy has expanded rapidly when western economies remain sluggish. A 10.3 percent annual cost had been hoe much China’s gross domestic product grew. This had been all within the second quarter. In the United States, that same figure had been only 1.7 percent. China’s exploding GDP has lead to soaring wages, food prices and real estate values. Consumer prices in China rose 3.5 percent in August spurred by a 7.5 percent boost in food prices. Real estate prices rose 9.1 percent compared to a year ago in China’s largest cities.
The purpose we will not see alterations from China’s cost hike
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 might be set off by the China increase of 25 basis points. The large issue for China is that its economy is so dependent on artificially low interest rates, the smallest increase will trigger financial distress. Based on Pettis, the China rate hike might hurt China. This would be because the country focuses on excess investment which would be hard to do anymore. But with a communist leadership change looming in 2012, that is unlikely, no matter how badly China needs it.
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
No comments:
Post a Comment