China Raises Rates, the World Freaks Out

China raised rates by a quarter percent. The move made headline news, currencies jumped, stocks tanked. Do we have yet another freak out over nothing? Or is it more China holds the globe's economy by the short hairs?

Firstly, the interest rate was about their housing market, which is overheated and to curb inflation, which has risen the most in 2 years.

China’s central bank unexpectedly announced Tuesday that it would raise interest rates for the first time in nearly three years, apparently in the hopes of dampening inflation and cooling off this country’s hot property market.

MarketWatch is reporting the dollar jumped 1.4% against a basket of currencies.

The U.S. dollar jumped 1.4% against a basket of currencies on Tuesday as a rate hike by China fueled worries that the world’s fastest growing economy was trying to slow down

The sudden interest rate increase happened at the same time The World Bank issued a new report, East Asia Pacific Update and China's GDP and CPI numbers are due out this week. The World Bank expects China's GDP to be 9.5% this year.

Real GDP growth is estimated to rise 8.9% in 2010, up 0.2% from our previous forecast, and in line with the average growth rate during 2000-2008. China remains the regional leader with an expansion of 9.5%. For the first time in a decade, five other countries are projected to expand by 7 percent or more (Thailand, Malaysia, Lao PDR, Mongolia, and PNG). Private sector investment is driving growth again, confidence is on the rise, and trade flows have returned to pre-crisis levels.

The World Bank also made a point to say China should allow a gradual rise in their currency exchange rate.

China could help stem the rising inflation it is likely to face in the short term by guiding the yuan higher, the World Bank said in a report issued Tuesday.

While further asset-price increases would pose a risk to China's rapidly growing economy, "a gradual rise" in the Chinese currency's nominal exchange rate could "help stem price pressures," the Washington-based international financial institution said.

A good example would be the roughly 20% rise in the yuan that China allowed from July 2005 to July 2008, said Vikram Nehru, the World Bank's chief economist for East Asia and Pacific Region.

Paul Krugman on today's announcement:

We’re doing the right thing; they’re making the world as a whole worse off.

According to the New York Times, a higher interest rate makes China's assets more attractive to investors.

In case anyone thinks China's raising of rates implies they are going to allow the exchange rate to raise against the U.S. dollar, think again:

Lardy said higher interest rates will simply require China to buy more dollars to restrain the yuan. “They’re going to have to work harder to keep the yuan from rising,” he said. Letting the yuan rise — as called for by the U.S. and other trading partners — won’t have as much impact on the property-price problem that worries Chinese authorities as higher interest rates will, Mr. Lardy said.

Another theory is China will not let the yuan rise to keep influxes of foreign capital out of the country.

The World Bank also warned on foreign money wanting high returns in Asia, particularly China.

Capital inflows have risen sharply this year, driven by abundant global liquidity in search of yield, combined with expectations of stronger growth in the region than abroad. Larger inflows have helped exchange rates appreciate substantially despite exchange market interventions by central banks. Inflows have also contributed to large increases in asset prices. If inflows remain strong, especially against a background of weak global growth, authorities will be faced with the challenge of balancing the need for large capital inflows - especially foreign direct investment - with ensuring competitiveness, financial sector stability and low inflation.

China saw a 6.1% rise in foreign investment in September.

Foreign direct investment in China increased at a faster pace in September, underscoring confidence in the outlook for the fastest-growing major economy and adding to pressures on the nation’s exchange rate. Investment rose 6.1 percent from a year earlier to $8.4 billion after a 1.4 percent gain in August.

So, maybe in response, maybe not, China has ordered state owned companies to buy out the private, foreign owned ones. Imagine the freak out if Obama ordered the same thing in the United States. But, once again, it's China, so nothing happens.

Bottom line, it seems China is wanting to keep their currency unfairly pegged to the dollar at any cost, and that cost is against the United States.

Meanwhile, once again, the U.S. Treasury delayed issuing it's report on China's currency manipulation.



Angry Bear agrees with this post

Angry Bear has up an analysis on the China interest rate hike and is also implying China is not re-evaluating their currency, instead devaluing it, in a subtle method by this rate hike.

That's the bottom line, China is not going to reduce their exports by re-evaluating their currency.

Gets better and for the life of me I cannot find the original post, but Zerohedge has a repost(?) of someone named Albert Edwards saying also that China will devalue, not increase, the yuan and so there is no choice but to enact wholesale tariffs against China.

I agree with that, playing China's game when the evidence is overwhelming their currency manipulation is giving them a huge unfair trade advantage, causing jobs to be offshore outsourced to China, hurting other economies, is a joke.

The Nash Equilibrium, is just referring to game theory, which says because China ain't playing by the rules, it's inevitable that the U.S. is going to enact wholesale tariffs...

although given our government and their refusal to act, get serious and play a no holes barred game of economic chicken and this time, actually win instead of lose...
we'll see. The U.S. has been playing to lose on trade, economics for a good 30 years now, long term.

Business Insider, tells us Albert Edwards is from Societe General.

I generally find your assertions cogent Mr. Bear but...

...the idea that Congre$$ or our corporate tool of a President are going to do anything to rebalance the conditions of trade with China is laughable.

Our political system, including the executive, is a wholly owned subsidiary of The Corporate Slave State and until we are all living in refrigerator boxes in alleys outside abandoned suburbs the voters will continue to go along with the current stupidity.

'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

Why can't the fed just

Why can't the fed just intervene directly, print dollars, and buy yuan.

the Yuan is pegged

so it doesn't matter what the volume is on the market, its exchange rate is fixed, in reality (despite what kind of announcement China claims). The Fed can devalue the dollar and then China owns a lot of Treasuries to keep the Yuan low.