Chinese Language Blog

Inflation and Interest Rates (通货膨胀跟利率) Posted by on Oct 21, 2010 in News

If you’ve been following news out of China recently, issues of inflation or 通货膨胀 (tōng huò péng zhàng), have been making most major media network headlines. Just a few days ago, China’s Central Bank,  in an surprise announcement, decided to raise interest rates or 利率 ( lǜ) by .25 percentage points in an effort to stymie growing inflation. Note here the gramatical pattern for discussing percentages in Chinese where one must first begin with 百分之 (bǎi fēn zhī) followed by a numerical amount to represent the percentage. Literally it translates as “out of one-hundred parts…”. For example 百分之十 equals “10%” in Chinese.

While a .25% increase is rather minute compared to the hikes in interest rates (or cuts) that occur within most dynamic financial market economies (such as the US), this is a big deal for a country with an artificially devalued currency, and strict monetary policy. China’s currency or 货币 (huò ) has been pegged to a basket of currencies, most notably the US dollar, Euro and Japanese Yen in hopes of making Chinese exports more competetive and cheaper to foreign markets. This policy has led to conflict among political actors and businesses who want a “fair footing” in the global exports game. These are the same clowns that led to the Asian Financial Crisis, so I believe China’s official stance has been “cry me the yangse river” and let us deal with our own sovereignty and financial policy.

Yet in the wake of the growing inflationary concerns (the consumer price index rose 3.6 percent from the previous September!), not to mention foreign pressure from the US and EU, China is now adjusting financial policy for two main reasons:

First this allows for the Chinese government to bolster domestic markets while simultaneously allowing greater purchasing power (due to increase in value to the Renminbi) for its citizens. The concern here is that the Chinese economy is “overheating” (10.3% GDP or 国内生产总值 (guónèi shēngchǎn zǒngzhí) growth just last quarter and 9.6 in the most recent third quarter) and needs to cool off, allowing for stable development.

Secondly by adjusting interest rates, the CCP is signifying a willingness to eventually revalue their currency and allow it to appreciate or 涨价 (zhàng jià) against other currencies. This is an important step, especially considering the coming CCP, US and EU elections that have nations considering “tit-for-tat” trade embargoes and tariff measures if the Chinese currency doesn’t revalue. This is good not only for China, which is looking to improve its domestic markets, but for the rest of the world as a whole, allowing for greater competitiveness among markets while we pull ourselves out of this recession.

The CCP central bank is expected to continue these slight .25% increases in interest rates in hopes of staving off growing inflation concerns while still promoting GDP growth around 9%. When foreign stock markets openned the day after the  interest rate hike, initially stocks plummetted amid concerns of an increase of the cost of doing business in China and the rippling effects across the global market. Yet in the last few days, markets have rallied, making up the ground lost and even gaining in the short term. Further, the US dollar has gained in value, making Chinese held assets more valuable.

It looks like the market “bears” and pessimists need to revalue their own claims about Chinese monetary policy and realize that what’s good for China often is good for the global financial and trade market. After all China is just as intertwined and emeshed in the global financial system as any other large nation-state actors. Is this the begining of a Chinese global financial policy? Stay tuned.

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About the Author: Stephen

Writer and blogger for all things China related. Follow me on twitter: @seeitbelieveit -- My Background: Fluent Mandarin speaker with 3+ years working, living, studying and teaching throughout the mainland. Student of Kung Fu and avid photographer and documentarian.

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