A blog on Chinese economy & society

When will China raise interest rate?

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The consensus is in Q2, but I’m not quite so sure. Exit policies come in many guises and I’m not convinced that hiking interest rate would be among the arsenals to be deployed.

For one thing, credit availability is not as sensitive to interest rate policy as in more matured economies. China can tighten through administrative measures, much in the same way the banks were ordered to lend like crazy last year.

More importantly, China just can’t hike unilaterally. By keeping its currency peg intact, China effectively has signed away its monetary policy autonomy. And since the US will remain ZIRPy in the foreseeable future, China will have to tighten through other means. There are two big IFs here, of course: that the peg will be maintained and inflation will be roughly in lined with the 3% target. On the other hand, by betting on interest rate hike in Q2, one is also effectively betting for revaluation or runaway inflation in Q2, neither of which is very likely in my opinion.

Regarding RMB revaluation, Washington is in the mood for blood right now. The political pressure is so intense that even long time China supporters, i.e. American MNCs, are having second thought. Now of course, the fury that they’re not getting more spoils really doesn’t have anything to do with serious decision like this. Just like Google, it’s all about value and principle.

But I digress. The point is, trade war is inevitable. The Minister of Commerce, Chen Demin, expected that China would slip into trade deficit in March even without any new punitive tariffs. Giving this background, there might not be a need for China to tighten anymore. Deflation might soon return as the resident boogie man.

Besides, hiking interest rate at this juncture does little to tame inflation but instead will attract hot money inflows which will make keeping the peg even harder.


Written by Cindy Luk

March 22, 2010 at 12:34 pm

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