Economists and investors were surprised with China’s first interest rate increase since 2007 on Tuesday. No official govt statement accompanied the move, however most economists agree that China’s exploding economy is feeding inflation that an interest rate hike is expected to keep in check. Investors fearing that a slowdown in China would hurt global growth sent markets down throughout the world, however as the Chinese communists prepare for a leadership alter 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.
Exactly what the China interest rate really is
.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 NY Times reports that the China cost increase is proof the Chinese govt 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 should be done in order to stop inflation from taking place when also increasing imports coming in. But the Chinese government fears that allowing the renminbi to rise will kill tens of millions of export jobs. All growth will hopefully be slowed for them. This could be done with the China cost hike which will also encourage savi! ng and help numerous get their lending under control.
China’s economy appears to be overheating
A huge economic stimulus package and aggressive lending by state-run banks pushed China out of the global financial crisis in 2008. The western economy has just sat without moving while the Chinese economy keeps expanding, reports CNN. A 10.3 percent annual rate was hoe much China’s gross domestic product grew. This had been all within the second quarter. It had been only 1.7 percent in the United States of America That had been for GDP. Wages, food prices and real estate values have gone up a lot in China because of this. In August, food prices in china went up 7.5 percent while 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.
What must change in China’s cost hike
Raising interest rates is typical when central banks want to check inflation. Business Insider’s Michael Pettis said the rising cost of living rate could be set off by the China increase of 25 basis points. The large problem for China is that its economic climate is so dependent on artificially low rates of interest, the smallest boost will cause financial distress. Pettis writes that more China rate hikes within the near future may put a dent within the country’s over-reliance on excess investment. In 2012, the communist leadership alter could take place in China. This is unlikely although it’s something China needs.
Details from
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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