A China interest rate hike, the first in that country in three years, disrupted stock markets and caught analysts off guard. No official government statement accompanied the move, but most economists agree that China’s exploding economy is feeding inflation that an interest rate hike is expected to keep in check. Fears that the China rate hike could drag on global recovery sent stock markets in Europe and the U.S. downward Tuesday, but some analysts think China will avoid any significant economic slowdown as it prepares for a 2012 leadership transition in the communist party.
The China interest rate hike
Just 0.25 percentage points, or basis points, is how much deposit rates and one-year lending rates are going up with the China interest rate hike. The Chinese government is really dependent on exports and excess investment while inflation continues to be uncontrollable. The New York Times says the China rate hike shows this clearly. The Chinese government fears that allowing the renminbi to rise will kill tens of millions of export jobs. Instead, the hope is the China rate hike will slow growth, get lending under control and encourage saving.
Chinese economy is overheating 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 reports that since then, the Chinese economy has expanded rapidly while western economies remain sluggish. China’s gross domestic product grew at a 10.3 percent annual rate in the second quarter. In the U.S., that same figure was only 1.7 percent. China has seen prices go up drastically. Real estate and wages have gone up, too. Consumer prices in China rose 3.5 percent in August, spurred by a 7.5 percent increase in food prices. There has been a 9.1 percent increase in real estate prices in China. This has happened in just one year.
New York Times: http://nytimes.com/2010/10/20/business/global/20yuan.html?_r=1&src=busln
CNN Money: http://money.cnn.com/2010/10/19/news/international/china_rates/
Business Insider: http://businessinsider.com/michael-pettis-pboc-rate-hike-2010-10
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