Monday, 27 December 2010

China raises interest rates

This was not exactly the present that investors were looking forward to on Christmas Day. From AFP/CNA:

China's central bank on Saturday raised interest rates for the second time in less than three months as authorities ramp up efforts to curb borrowing, rein in property prices and tame inflation.

The People's Bank of China said in a brief one-line statement that it will raise the one-year lending and deposit rates by 25 basis points each. The move takes the rates to 5.81 percent and 2.75 percent respectively from Sunday.

China's leadership have expressed confidence that they can tame inflation. From AFP/CNA on Sunday:

China is well-placed to tackle inflation and tame runaway house prices, Premier Wen Jiabao said on Sunday, while acknowledging that rising costs had made life harder for the poor...

Speaking on China National Radio Wen said: "The recent rise in prices across China has actually made life even more difficult for people on low and medium incomes."

But he stressed that thanks to government intervention "we are fully able to control the general level of prices".

Andy Xie thinks that China's inflation is one of the two things that can trigger the next global crisis.

The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation... China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011...

The ineffectiveness of the recent measures casts doubts on the government's sincerity in fighting inflation. The constant and marginal policy announcements could be interpreted that the inflation fighting is now largely a propaganda job. Such perceptions could spark popular panic, which would cause the household sector to hoard goods like rice and cooking oil. When the masses flee from holding money, a full blown crisis will unfold.

I have been arguing for increasing interest rates. That won't cure inflation either. It is meant to compensate depositors to sustain the value of their wealth...

Only when property prices drop sharply can we believe that the government is serious about fighting inflation. The level of property prices defines how much local governments can spend. Fighting the property bubble is a must for fighting inflation. As long as property price remains elevated, fighting inflation must be a show only.

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