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  • China's interest-rate hike causes turmoil

    latimes.com/business/la-fi-china-rates-20101020,0,6893805.story
    latimes.com
    China's interest-rate hike causes turmoil
    The central bank's move is aimed at reining in an unbridled real estate market and inflation in China. The move sends stocks and commodity prices plunging around the globe and raises new concerns about the U.S. recovery.

    By Don Lee and David Pierson, Los Angeles Times

    October 20, 2010

    Reporting from Washington and Beijing
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    A surprise interest-rate hike by China raised the prospect Tuesday that the world's economic locomotive will begin chugging at a slower speed — a move that battered stocks and commodity prices around the globe and raised fresh uncertainties over continued recovery in the U.S. and other developed nations.

    The immediate aim of the action by China's central bank was to cool the nation's overheated real estate market and rising inflation. With more rate increases expected, it could slow the overall growth of the world's second-largest economy.

    But any slowing in China could ripple abroad, creating new problems for already-struggling American businesses and workers. Much the same is likely in Europe and many other parts of the global economy.

    Although the U.S. economy's troubles are much bigger than China's fiscal policies, Simon Johnson, an MIT professor and former chief economist at the International Monetary Fund, said the latest step by the People's Bank of China "doesn't address the core of these [economic] imbalances."

    Friction has been increasing between the two nations over the widening trade deficit and allegations by some U.S. manufacturers that China manipulates its currency and unfairly subsidizes its exporters to maintain a price advantage.

    "It certainly doesn't reduce the tension," Johnson said of Tuesday's rate hike. "I would suggest it's not helpful."

    The effect will be felt most sharply in nearby Asian economies that have become increasingly dependent on the Middle Kingdom's markets and production base. But a decelerating Chinese economy may ultimately hit harder in the U.S. and other industrialized countries.

    Their recovery from the Great Recession has been slower and many are still struggling with tepid growth, high unemployment and the threat of deflation, rather than inflation.

    "We want China to consume more. The latest move would do the opposite," said Sung Won Sohn, an economist at Cal State Channel Islands. "Everyone wants to grow their economy through exports. But exports to China won't be as robust."

    The Dow index dropped more than 200 points during the day largely on the news from China before closing down 165, or 1.5%, at 10,979. Prices fell for oil, copper, zinc and other commodities, while the dollar strengthened as investors sought the safety of the greenback.

    The quarter-point rate increase will allow Chinese consumers to get bigger returns on their savings; the one-year deposit rate will go to 2.5% and benchmark lending rate to 5.56%.

    For the Chinese, "this is a step in the right direction," said Michael Pettis, a professor at Peking University's Guanghua School of Management. "In the long term they should do more. But like the exchange rate, you can't change it too quickly or there will be financial distress."

    While China has allowed the yuan to appreciate modestly in recent months, some analysts said Tuesday's interest rate hike may give Beijing reason to delay further strengthening because higher interest rates should help attract more capital inflows that could eventually boost the currency.

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    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  • #2
    China rate hike surprises markets

    By Howard Schneider
    Washington Post Staff Writer
    Tuesday, October 19, 2010; 8:49 PM

    China's unexpected decision to raise interest rates could heighten tension over its economic policies, highlighting the divide between the strong growth that has taken hold in some parts of the world and the laggard performance in the United States and Europe.

    The increase by the People's Bank of China was small but unexpected, jolting U.S. financial markets with concerns that China may try to slow its economy to counter inflaton even as the developed world worries about the potential for renewed recession.

    The hike in the benchmark interest rate to 5.56 percent reflected worry in Beijing about a recent boom in bank credit and a spike in property prices, and many analysts saw it as driven by purely domestic concerns that both should be tempered.

    U.S. stocks fell in response to the decision as well as to worse-than-expected results from tech staples IBM and Apple, overwhelming positive news that U.S. housing starts had edged slightly higher in September. The Standard & Poor's 500-stock index, a broad measure of U.S. markets, fell 18.81, or 1.6 percent, to 1165.90.

    China's central bank is not the only one among the world's faster-growing nations to switch to policies aimed at making sure growth does not get out of hand. In recent months, India, Brazil and Australia have begun raising rates, while nations such as South Korea and Indonesia have signaled that their rates may be raised soon.

    Those moves stand in contrast to the discussion in the United States, where the Federal Reserve is weighing whether to pump more money into the financial system to stimulate the economy.

    China's action, however, is of particular note. The country is now the world's second-largest economy, and its near 10 percent annualized growth has been an important prop to the global economic recovery.

    The International Monetary Fund has cautioned about the need for countries to coordinate policies to ensure the global recovery stays on track - and avoid a situation where budget cuts or curbs on growth in one part of the world contribute to a worse outcome overall.

    "Cooperation must be maintained. Without it the recovery is in peril," IMF managing director Dominique Strauss-Kahn said earlier this week at an economic conference in Shanghai, warning against "a cacophony of discordant voices, as countries increasingly go it alone."

    While the United States and developed countries struggle to boost growth and demand, China and other faster-growing nations have been working to manage an inflow of foreign capital as overseas investors turn to emerging markets for higher returns.

    In other places, such as Brazil, the influx of money has caused local currencies to appreciate. But in China, efforts to closely manage the exchange rate - and keep its exports competitively priced - means officials have had to intervene steadily in currency markets.

    Rising interest rates may draw even more outside capital into China - putting further pressure on the renminbi to rise in value.

    Finance ministers from the Group of 20 major economic nations are gathering in South Korea this week, and ongoing tension over currency is expected to be a central point of discussion.

    A U.S. Treasury spokesman said the agency had no comment on the Chinese rate decision.

    The Obama administration has urged China to relax its currency policy to let the renminbi rise in value based on market forces, and the IMF also has expressed concern that imbalances between major exporting nations and debt-laden importing countries are not evening out as hoped.

    Trying to battle inflation by raising interest rates may signal that the renminbi won't be rising in value by as much as the United States and other nations hope. A rising currency increases the purchasing power of local consumers, makes imports cheaper, and is one tool that can help restrain rising prices.

    The Chinese currency has been appreciating at a faster pace in recent weeks, but analysts at the Treasury and elsewhere say they will watch closely to see if the increase continues after the current round of G-20 meetings, once international attention turns elsewhere.

    In research notes on China's currency and interest rate policies, the consulting firm Capital Economics said the small rise in interest rates would have little effect on China's economic performance, but argued that the recent rise in the renminbi would soon "run out of steam" - in part because of concern about the same capital inflows that the increase in interest rates may encourage.

    If investors come to regard the renminbi as a "one-way bet" - only moving upward - then the flow of money into the country will only increase, the company's analysts concluded.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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