China ups Rates

China has upped rates but sadly it still subsidises its exporters …and substantially thanks to its currency peg with the dollar.

The People’s Bank of China yesterday raised the one-year lending rate by a quarter point to 6.06 percent and the one-year deposit rate an equivalent amount to 3 percent. The deposit rate remains almost 2 percentage points less than the pace of consumer-price gains, giving savers an incentive to buy goods and assets.

“The economy has been growing too fast” and policy makers are “behind the curve,” Andy Xie, an independent economist who previously worked for Morgan Stanley, told Bloomberg Television in Hong Kong today.

China’s rates remain 2.5 percentage points lower than they should be amid rising labor, energy and food costs and a “huge bubble” in the property market, he said.

Inflation is largely being driven by food costs. China’s State Council said it would do more to ensure stable grain production, including by raising minimum purchase prices for rice, state radio reported today.

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The Chinese govt has a difficult task ahead as there is not much avenue for savings to go other than risk ie in property and gold and the share markets, thanks to its skewed policy. Even though hardly any of the migrant workers are saving this yr, they haven’t still lost jobs en-mass.

But the policy has lead to loss of purchasing power especially among the urban lower middle class and low income earners, as food prices have soared . Worse china is facing drought, and wheat may see huge demand if Chinese crops output falters.

Interest rates should go up in developing economy as there is a big danger of public unrest over daily essentials  if the economies overheat in the near future.

Read a great piece Arabia, bread & democracy

The Remnimbi needs to appreciate and the communist govt has a tough task balancing the growth rate and inflation. It doesn’t want any sudden spikes ie a sudden change in its export competitiveness resulting in loss of demand and job losses , and is wary of  any repeat of the Tiananmen Square protest that too after the happenings in Egypt and Tunisia in the middle east. R

Any big move from China will impact the world and especially the developing world.

For India it is worse, we dont have the economic might of China, nor do we have much of a leadership as politics here is more of a vanshvad family business , we have a coalition govt that is working on the annual budget while attempting  its  next big corruption scam cover up , while sordid details of how the govt is run and who is in control turn up at regular intervals .

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