China raised interest rates on 28 October, somewhat to the surprise of many economists. Morgan Stanley’s chief economist Stephen Roach was one person who had previously recommended precisely such a course of action to cool the Chinese economy. In a commentary on 29 October, he wrote:
The interest rate hike announced by China’s central bank on 28 October is an important development for China and the rest of the world. It gives me confidence that Chinese policy strategy is now more balanced and, therefore, on the right course to cool off an overheated economy. That’s good news for the China soft-landing case. The global economy will not be without pressure, though. While somewhat lower commodity prices could provide a temporary windfall of purchasing power, any such impetus is likely to be swamped by the far more powerful impact of China’s trade linkages. In my view, a China slowdown does not appear to be a growth-friendly event for China, the rest of Asia, and the broader global economy.
A slowdown in the Chinese economy has been expected for a long time. Indeed, most -- like Roach -- would have hoped for a significant but mild slowdown to come sooner to avoid a more calamitous one later. However, the administrative measures that had been put in place by the Chinese authorities to slow the economy had obviously not been enough, as seen in the third quarter's growth (see my earlier post).
So while in the near term, the interest rate hike in China will be a damper on the world economy, it is a necessary evil and should be welcomed by investors who are more focused on the longer term. It's just unfortunate that it is likely to occur at about the same time that demand from the US also flags.
No comments:
Post a Comment