{"id":2223,"date":"2010-10-29T16:52:05","date_gmt":"2010-10-29T20:52:05","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=2223"},"modified":"2018-08-17T09:16:41","modified_gmt":"2018-08-17T13:16:41","slug":"rumor-of-another-rise-in-chinese-interest-rates","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2010\/10\/29\/rumor-of-another-rise-in-chinese-interest-rates\/","title":{"rendered":"Rumor of another rise in Chinese interest rates"},"content":{"rendered":"

My favorite source for all things geopolitical, Stratfor, is reporting this morning that their sources in China are saying that the government there is going to raise interest rates again in December.\u00a0 Recall the churning caused in global financial markets when the Chinese announced an interest rate increase October 18 of the year.\u00a0 Several weeks ago when the rates went up I spent some time discussing the reasons for the increase.\u00a0 I also said that I thought, net, the Chinese moves would be good for the worldwide economy.<\/span><\/p>\n

Why would the Chinese want to raise rates even further?<\/span><\/p>\n

1.\u00a0 Primarily, the Chinese are trying to switch their economy from a purely export-driven economy to a more consumption-based economy.\u00a0 Never mind the environmental impact of this, because the ramifications are scary to contemplate, why would the Chinese want to do this?\u00a0 See below.<\/span><\/p>\n

2.\u00a0 The Chinese want to cool off the massive inflationary heat that is developing in their economy.<\/span><\/p>\n

3.\u00a0 The Chinese want to create an environment in which they can safely allow their currency to appreciate in value.<\/span><\/p>\n

Currently, the interest rates in China actually provide a negative return to savers\/lenders if you take into account inflation.\u00a0 That is, real<\/em> interest rates are negative.\u00a0 [real<\/em> interest rate = interest rate paid to lender – inflation rate].\u00a0 When you save money you agree to have it sit idle and in return you receive interest to induce you to do so.\u00a0 But if inflation is greater than the rate you make by keeping your money idle then you are actually losing money.\u00a0 Inflation erodes the value of your money.\u00a0 Does this make sense?<\/span><\/p>\n

Rates are held at these crazy low (i.e. negative) levels to induce Chinese industry to borrow to fund massive growth projects.\u00a0 Effectively, because of the negative quality of real<\/em> interest rates,\u00a0the Chinese government is paying businesses to borrow money.\u00a0 Crazy!\u00a0 But you see projects take people to complete.\u00a0 So effectively the negative real<\/em> interest rate policy of the Chinese government is a full employment act.\u00a0 The social contract between the Chinese government and its people is that in exchange for promising you a job and income to support yourself and your family, the Chinese communists get to remain the sole, oppressive and suppressive, power in China.<\/span><\/p>\n

So why would anyone save any money in China?\u00a0 The answer is that they don’t really.\u00a0 Instead, citizens are placing their excess income in places like the real estate market.\u00a0 Needless to say, the Chinese government is starting to get very concerned about a potential real estate and economic bubble being created there.\u00a0 Does this sound familiar?\u00a0 Low interest rates induce excess borrowing which leads to inflated real estate prices.\u00a0 Hmmm.\u00a0 But the Chinese, unlike western economies and policy makers, is raising interest rates to cool the inflationary fires.<\/span><\/p>\n

Higher interest rates creates an incentive for citizens to hold on to their money in the form of savings, rather than investing it.\u00a0 It is hoped those Yuan that are saved are then eventually spent on some form of consumption.\u00a0 Frankly, this is a long shot.\u00a0 Consumption\u00a0takes more than just technical measures to induce, it is much more about creating a culture where people buy stuff they don’t need.\u00a0 Think Gucci, think Mercedes, think custom golf clubs, think junior high school, think stupid!\u00a0 But I do acknowledge that many Chinese are doing their best to ape the uglier aspects of Western consumer culture.\u00a0 My point though, is that it will take a long time to shift the preferences of the more than 1 billion Chinese from communist thinking to capitalist thinking.<\/span><\/p>\n

Higher interest rates lead to currency appreciation pressures because investors worldwide look at interest rates when they consider investing their deposits.\u00a0 Those who are inclined to save money look for the highest\u00a0real<\/em> interest rates they can find.\u00a0 But they also look at the strength of the economy that is paying those rates to make sure that risks are acceptable.\u00a0 That is, the stronger the economy, the more likely it is that borrowers can pay their interest rates obligations.\u00a0 This creates a demand for the currency of the higher real<\/em> interest rate economy relative to the prospective lender’s home currency.\u00a0 So it boils down to supply and demand.\u00a0 Higher interest rates creates a demand for the currency, and with a fixed supply of the currency, prices rise.\u00a0 Does that make sense?<\/span><\/p>\n

All of this is interesting, but the BIG news of the day is that the Chinese are interested in continually raising interest rates throughout the next several months.\u00a0 I consider this to be a good thing.\u00a0 It would be nice if the Chinese economic bubble did not burst, but the hot air was let out slowly.\u00a0 It would also be nice to see the Chinese economy run more for efficiency than full employment.\u00a0 And, as a citizen of the U.S., it would be nice to see the yuan appreciate in value.<\/span><\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

My favorite source for all things geopolitical, Stratfor, is reporting this morning that their sources in China are saying that the government there is going to raise interest rates again in December.\u00a0 Recall the churning caused in global financial markets when the Chinese announced an interest rate increase October 18 of the year.\u00a0 Several weeks […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-2223","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2223","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=2223"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2223\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=2223"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=2223"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=2223"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}