A China interest rate hike caught the world off-guard and shows the government is more worried about inflation than it is willing to admit. Image: CC peruisay/Flickr

The first China interest rate hike since 2007 caught analysts by surprise and knocked  world markets off-kilter. The Chinese government offered no explanation, but consensus among experts is China has recognized the need to stem inflation in its economy. Fears that the China rate hike could drag on global recovery sent stock markets in Europe and the U.S. downward Tuesday, but some analysts think China will avoid any significant economic slowdown as it prepares for a 2012 leadership transition in the communist party.

The China interest rate hike

The China interest rate hike raises benchmark one-year lending and deposit rates by 0.25 percentage points. The New York Times reports that the China rate hike is proof that the Chinese government is struggling to control inflation, skyrocketing housing prices and an economy overly dependent on exports and excess investment. Many economists stress that China should raise the value of its currency, the renminbi, to fight inflation and increase imports. But the Chinese government fears that allowing the renminbi to rise will kill tens of millions of export jobs. Instead, it hopes the China rate hike will slow growth, get lending under control and encourage saving.

China’s overheating economy

A huge economic stimulus package and aggressive lending by state-run banks pushed China out of the global financial crisis in 2008. CNN reports that since then, the Chinese economy has expanded rapidly while western economies remain sluggish. China’s gross domestic product grew at a 10.3 percent annual rate in the second quarter. U.S. GDP rose 1.7 percent. China’s exploding GDP has lead to soaring wages, food prices and real estate values. Consumer prices in China rose 3.5 percent in August spurred by a 7.5 percent increase in food prices. Real estate prices rose 9.1 percent compared to a year ago in China’s largest cities.

Why China’s rate hike won’t work

Michael Pettis at Business Insider said that the China rate hike is too little to offset its inflation rate. China’s economy is so dependent on artificially low interest rates, the smallest increase will cause financial distress. Pettis writes that more China rate hikes in the near future may put a dent in the country’s over-reliance on excess investment. But with a communist leadership change looming in 2012, that is unlikely, no matter how badly China needs it.

Reports dated 12/22/2009 state that the US economy is recovering at a rate of 2.2% over the last quarter, but this was below the earlier predicted figure of 3%. There could be a number of reasons for this particular slowdown, but no explanation has been offered as to what this will mean for the common US citizen. Will they get jobs? Will they be able to spend less time online or in lines waiting for a personal loan to be approved? That is a question that will plague the minds of most Americans.

Optimism From One Day?

The downfall of the economy happened over a period of time, rather than in a single day. What started out as a trickle ended up as a tsunami and affected the entire country, as well as most of the world. But it wasn’t just the people and companies affected. States managing unemployment benefits and other assistance programs are also on the verge of borrowing huge sums of money from the government. How then can the economy be on the verge of a recovery? Available figures state that the recovery is slower than expected. The above statement was based on a day of high fives on Wall Street when investors dumped the US Treasury and pushed the stock markets up. Of course, the media had a field day with this by making a preposterous claim that the economy was on the verge of a recovery. One wishes that they were correct, but figures certainly prove them wrong, at least for now.

No Relief in Sight

Compared to the people who frequent the stock markets and share the sentiment of the economic “gurus”, there are millions without jobs, in debt and living in the fear of losing their homes. These are people who do not even understand what the reports on the economy mean, let alone even care about them. Their only concern is to save their homes, get a job and put food on the table, and they will do so by using the last cent that they have saved. Even taking a personal loan to make ends meet is also an ever-present option in their minds. They understand the basics of life, but not the intricacies of the stock markets.

The Problems Just Don’t End

Current figures available from a number of sources state that unemployment is set to increase over the next year, yet the cost of living is not going down at all. Assistance for the unemployed may be cut while taxes increase, and all people can do is look towards the skies and hope for divine intervention. Even that looks difficult at the moment with all the snowstorms blasting the country. Personal loans taken out have to be repaid while fresh applications need to be made to stay afloat in the coming months. All of this will create a sense of pessimism among the public and leave them wondering if it will ever end.

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