China Hikes Interest Rates Another Notch

As expected, China’s central bank has raised its benchmark interest rates before the end of the year. Its one-year lending rate goes up by a quarter of a percentage point to 5.81% from 5.56%, effective Dec. 26th. The corresponding deposit rate rises to 2.75% from 2.50%. It is the second rate rise in as many months and another turn of the screw in the fight against inflation. We expect to see more rate rises in 2011 to push up the price of credit as well as more quantitative measures to reduce its supply. Yesterday, Hu Xiaolian, a deputy governor at the People’s Bank of China told a meeting of bankers that China “should maintain a reasonable and moderate credit growth next year that is in line with the country’s goal in economic development and inflation control”.

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3 Comments

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3 responses to “China Hikes Interest Rates Another Notch

  1. China has not desire to fight inflation which would require capital controls rather than rate hikes. Impressive capital controls would crash China’s real estate bubble economy, bankrupting both the govenrment as well as highly leveraged Chinese elites. That´s China, not America that is experiencing hyperinflation, that is “printing money” that is inflating away its debts as fast as possible.

  2. China Bystander

    China is imposing capital controls but gently. It wants to let down the real estate bubble, not see it burst. There are, as you intimate, powerful Party and state-owned enterprises that would be badly hurt by a collapse of the property market. Equally it would be in few parties’ interests inside or outside the country for the Chinese economy to endure a hard landing. Policy makers are acutely aware of the difficulty in mopping up the excess liquidity left over from the stimulus without letting GDP growth slow below the politically significant 8% mark. The one little-used tool they could employ would be to let the exchange rate do some of the heavy lifting, but that, too, has political problems of its own. — CB

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