Home » Opinion » Chinese Views
Rate hike sane step in topsy-turvy world
By Sun Lijian |
November 2, 2010, Tuesday
|
Print Edition
Print Edition
WHY did China's Central Bank buck the trend and announce surprise interest rate hike at a time when the major economies of the world are adhering to their lax monetary policy?
The reasons are threefold: First, inflation and real estate bubbles have become the biggest problems confronting China. Quantitative easing, which worked before, will likely be less effective.
Second, as the yuan's appreciation gains momentum, it fuels the expectation for yuan assets to rise in value. Interest rate increases serve to deflate resulting bubbles.
Third, the bigger economic picture has changed, spelling the end of a moderate monetary policy. According to the newly unveiled 12th Five-Year Plan, China has mapped out an array of policy initiatives aimed at better, not faster, sustainable growth.
The rate hike has laid the groundwork for future healthy monetary policy making and also signaled the start of China's wind-down of its stimulus efforts. Of course, the rate hike, which has limited impact, should be construed more as a wake-up call than an abrupt disruption to an economy long thriving on low interest rates.
Downside
The downside of the rate hike is equally apparent.
First, the contrasting approach to monetary controls between China and the rest of the world, coupled with a stronger yuan, will prompt hot money to pour in, adding to the pressure for the yuan's ascent. Second, though the difference between lending and borrowing rates remains the same, the upcoming round of rate hikes could considerably dampen banks' profits amid a systemic overhaul of their credit services.
What's more, the yuan's appreciation, a spike in commodity prices and increased financing costs will combine to narrow businesses' profit margins. Finally, the hike came suddenly and could dent worldwide stock prices.
Despite all the concerns, China's government must have already braced itself for this prospect. For instance, it has strengthened the regulation of foreign capital and channeled bank funding into projects endorsed by the 12th Five-Year Plan. As things stand, I'm of the opinion that a drastic depressing of housing prices, like the introduction of property tax, will be postponed.
From another perspective, the yuan's rise and the rate hike were both voluntary, which attests to China's willingness to take on more as a responsible country. Unlike others, it didn't join and intensify the currency war. Right now, keeping domestic interest rates zero or even negative has been the common response of the US, Europe and Japan to their woes such as high unemployment.
This has redirected global liquidity from dollar and euro assets to bulk commodities and relatively secure assets of emerging economies. An unpleasant result is currency appreciation, inflation and bubbles. Therefore, it's the emerging economies and developing countries, especially those yet to recover from the recession, that first raised interest rates.
Self-interest
China's single-handed attempts at correcting global imbalances are far from enough in the topsy-turvy world economy. What matters most is that the nations and regions holding anchor currencies - the dollar, euro and yen - stop shirking their duties to stabilize the international monetary system after its meltdown, jettison zero or negative interest rates established out of self-interest and refrain from pumping liquidity into domestic markets by printing more money amid the panic flight of capital.
Self-serving moves won't ease the miseries of individual economies hit by the financial crisis. In an open economic environment, they will only backfire and undercut the well-meaning initiatives of others. In fact, the spark of currency war is already spreading like a prairie fire. Continue down this risky road, and the costs will be more than we can bear.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
The reasons are threefold: First, inflation and real estate bubbles have become the biggest problems confronting China. Quantitative easing, which worked before, will likely be less effective.
Second, as the yuan's appreciation gains momentum, it fuels the expectation for yuan assets to rise in value. Interest rate increases serve to deflate resulting bubbles.
Third, the bigger economic picture has changed, spelling the end of a moderate monetary policy. According to the newly unveiled 12th Five-Year Plan, China has mapped out an array of policy initiatives aimed at better, not faster, sustainable growth.
The rate hike has laid the groundwork for future healthy monetary policy making and also signaled the start of China's wind-down of its stimulus efforts. Of course, the rate hike, which has limited impact, should be construed more as a wake-up call than an abrupt disruption to an economy long thriving on low interest rates.
Downside
The downside of the rate hike is equally apparent.
First, the contrasting approach to monetary controls between China and the rest of the world, coupled with a stronger yuan, will prompt hot money to pour in, adding to the pressure for the yuan's ascent. Second, though the difference between lending and borrowing rates remains the same, the upcoming round of rate hikes could considerably dampen banks' profits amid a systemic overhaul of their credit services.
What's more, the yuan's appreciation, a spike in commodity prices and increased financing costs will combine to narrow businesses' profit margins. Finally, the hike came suddenly and could dent worldwide stock prices.
Despite all the concerns, China's government must have already braced itself for this prospect. For instance, it has strengthened the regulation of foreign capital and channeled bank funding into projects endorsed by the 12th Five-Year Plan. As things stand, I'm of the opinion that a drastic depressing of housing prices, like the introduction of property tax, will be postponed.
From another perspective, the yuan's rise and the rate hike were both voluntary, which attests to China's willingness to take on more as a responsible country. Unlike others, it didn't join and intensify the currency war. Right now, keeping domestic interest rates zero or even negative has been the common response of the US, Europe and Japan to their woes such as high unemployment.
This has redirected global liquidity from dollar and euro assets to bulk commodities and relatively secure assets of emerging economies. An unpleasant result is currency appreciation, inflation and bubbles. Therefore, it's the emerging economies and developing countries, especially those yet to recover from the recession, that first raised interest rates.
Self-interest
China's single-handed attempts at correcting global imbalances are far from enough in the topsy-turvy world economy. What matters most is that the nations and regions holding anchor currencies - the dollar, euro and yen - stop shirking their duties to stabilize the international monetary system after its meltdown, jettison zero or negative interest rates established out of self-interest and refrain from pumping liquidity into domestic markets by printing more money amid the panic flight of capital.
Self-serving moves won't ease the miseries of individual economies hit by the financial crisis. In an open economic environment, they will only backfire and undercut the well-meaning initiatives of others. In fact, the spark of currency war is already spreading like a prairie fire. Continue down this risky road, and the costs will be more than we can bear.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
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