A proactive China is a good thing

Early this morning the Chinese central bank announced that it was going to raise its benchmark interest rates for deposits and lending by another 0.25%.  Specifically, the benchmark rates are: 5.81-6.06% for lending and 2.75-3.00% for deposits.  This is the third increase since October 19.

Analysis: I have spoken often about the overheating of the Chinese economy and the need for a Chinese government intervention in order to cool off the economy to protect gains they have made in gross domestic product (GDP).  I have also talked about the potential ramifications of a Chinese economic bubble bursting on China and the rest of the world.

It has been my opinion that the Chinese government’s actions are uncoordinated, scattered and lacking in the teeth necessary to prevent a rough landing for the Chinese economy.  However, what I have not mentioned, and bears mentioning, is that a proactive China is a good thing.  Unlike the U.S. and European central banks of the real estate bubble era, the Chinese recognize that they are in the midst of a bubble and that they should do something about it.

It is my opinion that the primary problem that the Chinese economic authorities have is a banking and business community well versed in skirting official government action.  After all, the country was not just politically Communist dating back to 1949, it was also economically Communist.  Because of the lack of omniscience on the part of any Communist central planning authority, capitalistic markets always form themselves spontaneously to satisfy otherwise unmet demands.

Thus, an entire culture knows exactly how to get a loan if they need one and from un-official sources.  This does not bode well for the bursting of a Chinese economic bubble and for the maintenance of a certain GDP standard.  However, that the Chinese government is actively involved in trying to manage a potential crisis before it unfolds is a very good thing.  I just don’t think that they will be able to rein in the Chinese economic dragon before it has breathed all of its fire.

Importance grade: 6; it’s good that the Communist party of China is trying to contain their economic bubble by raising interest rates.  However, I don’t think they are going to be able to fully mitigate their problems with such subtle measures.

Jason