Yesterday’s interest rate rise from the People’s Bank of China was sudden enough to wrong-foot global markets, and the jitters continue today, with markets in London, Germany and France following the US down.
Economists were broadly supportive of the hike, which moved the one-year yuan lending rate to 5.56% from 5.31% and the deposit rate to 2.5% from 2.25%. The broad message was that further rises are on the way to cool the economy and the rampant property markets, and that tomorrow’s GDP figures are likely to come in stronger than expected.
However, Diana Choyleva at Capital Economics in Hong Kong believes Chinese officials are now caught between a rock and a hard place. By raising rates to curb inflation and cool the economy, the authorities are hurting domestic demand, just at the time when the world is piling pressure on China to rebalance its economy away from exports.
And if China tries to grab a larger slice of world trade to keep its economy going, the US is now likely to intervene with trade sanctions. "Whichever combination of tools is used, China’s short-term growth prospects look bleak," says Ms Choyleva. "Beijing’s policy choices have become that much harder as the financial crisis brought the end of the benign international environment that helped China’s development since entry into the WTO in 2001."
By delaying its monetary tightening and turning on the fiscal stimulus taps to ensure its economy was healthy, China seems to have stored up some pain for itself going forward.
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