A blog on Chinese economy & society

Interest rate hike in the air?

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Of more serious note is the possibility of interest rate hike. Investors are nervous enough to have 2 failed bills auctions.

How likely is an imminent hike? Quite. The Chinese property market is getting really out of hand. The central government has so far tried various administrative measures, to no avail. In fact, Beijing’s Q1 property prices has gone up 88% (!) YOY. The bubble has already spreaded to many secondary, or even tertiary cities. Excess liquidity so far is still largely held within the sector. However, if this keeps up, driving up expectations, inflation could very likely spill over to the real economy, causing political problem. Bear in mind that 1989 Tiananmen protest was partly stoked by raging inflation.

Chinese media is reporting a special property tax to be levied in 4 guinea pig cities: Beijing, Shanghai, Shenzhen, and Chongqing. Could this be the last resort?…before the interest rate hike sledgehammer that it. If this latest effort fails, then the central bank may have no choice but to tighten with the real thing. The decision to go on a soft peg on the currency front actually helps freeing Chinese monetary policy from that of the US. So there will be more leeway for an unilateral hike.


Written by Cindy Luk

April 9, 2010 at 9:21 pm

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