China’s interest rate hike may not slow economy
As previously reported by SteelOrbis, the People's Bank of China decided to raise its one-year interest rate last week for the first time in nine years by 0.27% to 5.58% from 5.31%. There are three reasons behind the interest rate hike. First, the rapid growth of the fixed-asset investment that has overheated China's economy. In 2003, fixed-asset investment grew by 26.7% and by 43.5% to its highest level in March. Fixed-asset investment showed a 30.3% rise in the first eight months of the year, despite government started to implement new macro-economic measures in April. Second, inflation still creates pressure. Country's inflation rate rose by 4.2 percentage points within a year. The increase in inflation is attributed to the higher food prices and international oil prices. Third is that fact that people's savings, which decreased bank's liquid funds and increased financial risk, have continuously dropped. However, the 0.27% hike may not resolve the overheated economy. Because, massive foreign exchange is flooding into China's market due to country's low exchange rate. Since last year, Central Bank of China has been forced to absorb more than $10 billion of foreign exchange every month to maintain the fixed exchange rate. In July, this amount was still at $12.4 billion. As a result, Chinese authorities have pledged to make the Yuan more flexible through reforms, saying fundamental preparations had been made but stressing the need to avoid volatility. The indications state that Beijing may hasten steps to adopt a market-oriented currency and allow the Yuan, which pegged against the US Dollar around 8.28 since 1997-98 Asian financial crises. The currency reforms would proceed in a gradual and steady way by taking into account banking reforms and the impact on domestic and global economies.