February 1st, 2011
Econintersect: China, increasingly worried about inflation, plans to continue tightening its money supply and will probably raise interest rates again within the month, according to the New York Times. As China raises interst rates to fight inflation, this may slow the rapidly expanding real estate market, slow expansion of manufacturing and increase the exchange rate value of the yuan. The NY Times says that is the forecast of economists and bankers with knowledge of policy makers’ views, who insisted on anonymity because of the political and diplomatic sensitivity of Chinese monetary policy. Follow up:
Follow up:China is attacking possibly overheating growth on multiple fronts. Last week there were reports of significant slowdown in real estate transactions and prices after Shanghai imposed a 0.6% property tax and lending requirements for residential housing were tightened. In December the government announced efforts to slow down inflows of "hot-money" from increasing international liquidity.
From The New York Times:
Inflation lately has caused friction in China’s mighty export machine. Now, Beijing’s efforts to fight inflation, through higher interest rates and tighter restrictions on bank loans, could begin to slow segments of China’s domestic economy slightly — particularly the breakneck pace of investment in new factories, office buildings and apartment complexes.
That, in turn, could weaken demand for industrial materials like steel and copper that depend heavily on Chinese purchases.
And yet, the tighter-money policies and higher interest rates could be good news for Chinese consumers, whose spending China has been counting on for its next wave of growth — not only to help balance the country’s export-dominated economy but to enable more of the nation’s 1.3 billion citizens to share in its prosperity.
For one thing, a slowdown in speculative construction could slow or even temporarily reverse the long rise of Chinese real estate prices, as 15 million people a year pour into the cities.
The accompanying rise in the value of the yuan would increase the purchasing power of the Chinese populace and lead to increasing domestic consumption at the same time that exports would be declining. This is one pathway to correcting the trade surplus imbalance that China has built up over the past two decades.
However, not all possible outcomes are positive. Some hedge funds are betting that China will slow down to a hard landing are making investment bets shorting Chinese positions. And Goldman Sachs reversed a long held bullish position on China last month.
Sources: GEI News and Analysis (links in article) and The New York Times