Chinese interest rate rise

You may have heard that in a surprise announcement the Chinese government raised interest rates 0.25% on Saturday, 25 December.  As I have been writing about on the blog for several months, the effort is being launched to ease inflation pressures in China.

Analysis: In my 2011 Predictions post I said that, “The Chinese are on the brink of two ugly things: massive asset inflation and the bursting of that bubble…”  The worldwide economy remains in a slightly fragile state of recovery after the Great Recession.  Thus, it’s a good thing that the People’s Bank of China has raised interest rates.  The last thing that the worldwide economy needs is another out-of-control bursting asset bubble of massive proportion.

That the Chinese had to raise interest rates again so quickly is an affirmation of what I wrote in my “2011 Predictions.”  Clearly, the Chinese are more worried about inflation than they have let on to the worldwide investment community.

My opinion remains that the Chinese are going to have a difficult time balancing both the slowing of the economy and keeping social protests to a minimum.  The gap between the haves and have-nots in China has grown tremendously over the past 10 years.  So the pseudo-communist system is not exactly working for everyone in China.  A dramatic slowdown in the Chinese economy, brought on by an overzealous People’s Bank, would result in disproportionate hardship on the have-nots in China.  That, in turn, would likely lead to virulent social protest.  Thus, the Chinese are going to have to have a slight bias toward economic growth in order to maintain political control and order.  In turn, that will likely lead to a sloppy burst of the Chinese economic bubble.  Ouch!  Clearly neither scenario is a good thing for China; and, in my opinion, it is a near impossibility to balance the two opposing forces.

Importance grade: 7; that the Chinese raised interest rates again means that they are nervous about their bubble despite their public comments to the contrary.  I will continue to watch this story very closely.

Jason