A China interest rate hike, the first in that nation in three years, disrupted stock markets and caught analysts off guard. The Chinese government offered no explanation, but consensus among experts is that China has acknowledged the have to stem rising cost of living emerging from its heating up economy. Investors fearing that a slowdown in China would hurt global growth sent markets down globally, however as the Chinese communists prepare for a leadership alter in 2012, analysts expect them to maintain a high level of growth. Resource for this article – Surprise China rate hike reveals country worried about inflation by Personal Money Store.
The bigger rate of interest for China
One year lending and deposit rates are rising .25 percent points with the China interest rate hike. 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 NY Times explains that this is what the China cost hike 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 occurring while also increasing imports coming in. If the renminbi went up in value, tens of millions of export positions could possibly be lost. This is the biggest concern for the Chinese government. The China rate hike is expected to encourage saving, help lending get under control and ! slow any growth.
China’s overheating economic climate
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. It had been only 1.7 percent within the United States That had been for GDP. 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 issue with China’s cost hike
When checking inflation, a financial institution will raise interest rates. However, Michael Pettis at Business Insider said the China cost hike of 25 basis points is too little to offset its rising cost of living rate. China is known for the super low interest rates it has. This is why a small increase is going to make a huge difference. China’s over-reliance on excess investment might be hurt with the China cost hikes, according to Pettis. But with a communist leadership change looming in 2012, that is unlikely, regardless 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
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