As I discussed previously, China has been going through an impressive growth period over the past few years. The country's growth rate increased analysts' concerns about a possible "bubble economy," and following its decision o tighten monetary controls in 2008, China raised interest rates for a sixth time this year.China's move is designed to put a curb on a price surge that has brought inflation to its highest level in a decade in the world's most populous country. Due to concerns about a debt crisis caused by defaults on bank loans, Beijing had also taken some preventative measures such as imposing lower investment spending on new factories, office buildings and other assets.
According to the central bank, the interest rates for a one-year loan will increase by 0.18 percentage points to 7.47%. Rates on bank deposits will climb by 0.27 percentage points to 4.14%. The bank's decision is not a surprising one if we take into account that consumer prices rose by 6.9% in November, hitting he highest inflation rate since 1996. Economists blamed an 18.2% growth in politically sensitive food costs for the price surge.
One economist at Standard Chartered, Stephen Green, believes the authorities' decision on interest rates was caused by "the apparent recent acceleration of non-pig food inflation and higher producer prices." Green also thinks that the Chinese will have to deal with food inflation problems for at least six more months.
Looking ahead, Chinese leaders anticipate the economy will grow by more than 11% this year. The government wants to reduce poverty that came after booming exports were offset by repeated rate hikes, investment curbs and measures to tighten credit. Inflation fears are also a key element for the government's decision to raise interest rates, hoping to "ensure adequate market supply and stabilize food prices."
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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