Economists and investors were astonished with China’s first rate of interest increase since 2007 on Tuesday. In contrast to common practice at the Fed for such moves, the Chinese govt didn’t provide a statement justifying the increase. Nevertheless, economists say it is clear that China is coming to grips with the inflationary consequences of a rapidly expanding economic climate. Investors fearing that a slowdown in China would hurt global growth sent markets down worldwide, but as the Chinese communists prepare for a leadership change in 2012, analysts expect them to maintain a high level of growth. Article source – Surprise China rate hike reveals country worried about inflation by Personal Money Store.
The bigger interest rate for China
.25 percentage points, or basis points, are how much deposit rates and one-year lending rates are going up with the China interest rate increase.. The New York Times accounts the China cost increase is proof that the Chinese government is struggling to control rising cost of living, skyrocketing housing prices and an economy overly dependent on exports and excess investment. 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 occurring while also increasing imports coming in. If the renminbi went up in value, tens of millions of export positions could be lost. This is the biggest concern for the Chinese government. All growth will hopefully be slowed for them. This can be done with the China rate hike w! hich will also encourage saving and help many get their lending under control.
China’s economy appears to be overheating
The govt pushed a stimulus package on the nation in 2009 during the global financial crisis leading to more lending in state run banks. This left China out of the whole thing. The western economic climate has just sat without moving while the Chinese economic climate keeps expanding, accounts CNN. A 10.3 percent annual cost had been hoe much China’s gross domestic product grew. This was all within the second quarter. U.S. GDP rose 1.7 percent. Wages, food prices and real estate values have gone up a lot in China due to this. In August, food prices in china went up 7.5 percent when consumer prices gained a 3.5 percent boost. Real estate prices rose 9.1 percent compared to a year ago in China’s largest cities.
The issue with China’s rate hike
When checking rising cost of living, a financial institution will raise rates of interest. However, Michael Pettis at Business Insider said that the China cost hike of 25 basis points is too little to offset its inflation rate. The large issue for China is that its economy is so dependent on artificially low rates of interest, the smallest increase will trigger financial distress. China’s over-reliance on excess investment can be hurt with the China rate hikes, based on Pettis. Even though China might need a communist leadership change in 2012, it will not probably occur.
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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