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Home >> Business
UPDATED: 11:30, November 02, 2004
Chinese interest rise shakes international market
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China announced interest rate rise for the first in nine years on Oct. 28, 2004. North American public opinion believes "the interest rate rise shows Beijing is adopting more market-oriented means to macro-control overheated econom"' and "the sudden interest rate rise by the Chinese central bank has won widespread applause from economists''.

Chinese economy has become an important momentum for the global economic growth. Its enormous demand has given support for keeping the prices of global crude oil and bulk commodities running high. In New York, John B. Taylor, under secretary for International Affairs at the US Department of Treasury thinks the Chinese interest rate rise is an active step. It reduced the threat to hard landing of Chinese economy and US will benefit from it.

The US expert praised Chinese interest rate rise. When having interview with local media he applauded the interest rate rise is one of Chinese efforts to control inflation and to maintain sustainable economic development. It contributes to a move towards flexible exchange rate system. Taylor expressed that the interest rate rise shows China is more market-oriented in policy, which will push renminbi towards free floating.

Taylor said the efforts to prevent the overheating of the Chinese economy would also be conducive to the exports of US main commodities to China. "Only with the sustainable growth of Chinese economy, there will be export increase for us''. US exports to China will be up 34 per cent this year. Of all US export markets, the increase of Chinese imports from US is ranked third, only next to Canada and Mexico.

According to the estimates by Stephen Roach, chief economist with Morgan Stanley Chinese interest rate rise will slow down the global economic growth next year, which already lacks of strength. Roach pointed out for those countries with high dependence on China this is a challenge. He thinks the most worthy of worrying are countries including South Korea, Japan and Germany. According to the estimates by Roach, more than 40 per cent of export growth for Japan and South Korea comes from China while the ratio for Germany is 28 per cent.

Some economists think Beijing's interest rate rise gives such a signal that although its domestic economy shows sliding evidence China still has worries about the inflationary pressures. The interest rate rise is also likely to show Beijing deems it not enough for the effect of administrative intervention measures. Since the beginning of this year, the administration intervention measures China implemented include tight credit and the limitation of land supplies for real estate developers. According to experts the Chinese interest rate rise will reach 2-3 percentage points in coming 12 to 18 months.

Negative role for interest rate rise
Nevertheless if market demand turns sluggish other issues may be brought to China. Abundant funds flowing to banks or for buying debenture will constitute pressure for renminbi's increase in value. Interest rate hike will likely encourage more speculative money influx, increasing the pressure for renminbi's exchange rate hike. If renminbi is increased in value, the export commodities will be increased and the exports -- the key power for the growth of Chinese employment and economy will be damaged. Judging from the breadth of the interest hike, it is believed by experts that it is not a big pressure for renminbi's exchange rate to bear appreciation. If consumers' willingness to buy reduces, the sectors including auto industry, which has started to slow down their growth rate, will further suffer. Some companies including Volkswagen, General Motors and Ford are setting up consumers' financial subsidiaries to bring next surge via credit promotion. After two years of more than 50 per cent increase in auto market, a sudden brake appeared in September this year with a decline of 3.6 per cent in the sales volume of the month. The sales volume of several popular cars was declined for more than 50 per cent in September if compared with the same period of last year. However, some other economists believe the interest rate hike is not a good signal. It shows the administrative means could not effectively restrain economy from growth. As a result, the government pins its hope on lending rate hike. Judging from other market-oriented countries the economic cooling effects could not be achieved through interest rate system under such economic conditions.

But other economists believe after interest rate rise China still has great demand for raw materials. In fact, China has high investment in the industry of building materials. This will lead to the sustainable increase in the demand of raw materials. China imported 148 million tons of iron ore last year. It is estimated that the number will reach 200 million tons.

Influence from interest rate hike
The sudden rise of benchmark rate on Thursday has brought a certain shake to futures and finance markets. Many futures prices and the stocks of companies producing various raw materials were dropped. The crude oil prices in New York were down US$1.54 on Thursday or about 8 per cent. The futures prices for many raw materials including steel and coal were dropped to varying degrees.

Chinese sudden rise of interest rate reduced its influence on the world's futures market last Friday. The experts studying Chinese economy remind investors the interest rate rise will have no influence on the requirement of raw materials in China. The interest rate hike shows that Chinese financial reform will be accelerated.

Wells Fargo Chief Economist Sung Won sohn believes interest rate rise does not play a significant role on domestic demand and economic overheating. The sudden interest rate hike after seven years does not put emphasis on the home market but on the world market. Sung said, "I think China's main idea is to conciliate US and other members of Group 7. The Group 7 has asked China to adopt market mechanism to adjust interest rate and currency value. The decision of the central bank shows that the bank is moving forward towards market orientation.

Of cause the interest rate hike will increase the burden for enterprises' loans, which has little influence. On the contrary, with the savings interest rate rise, inhabitants' savings will be encouraged, which is beneficial to the economic development. However, Sung believes the role is the secondary if compared with international influence.

Another reason causing strong reaction from the world is that the interest rate rise is only the beginning. After a year's macro-control policy, the economic growth rate is still kept at more than 9 per cent. The cooling is harder than expected. So some analysts believe the central bank will have interest rate rise for more times.

US FedEx Chief Economist Gene Huang said since the beginning of this year, Chinese economic growth rate is kept at high with increasing inflation pressure. The Chinese government will likely keep its economic growth by way of interest rate hike. The interest rate hike has opened the door for interest market. In future the interest rate will be decided by market changes. The transformation is of significance. Huang thinks, "China has adjusted the benchmark rate. The savings rate for commercial banks has not changed while the lending rate has been raised in a big margin. They can decide lending rate according to lending risk excluding credit cooperatives in both urban and rural areas. This is a very important reform. After doing this, it is very significant for small- and medium-enterprises to get loans and to prevent from illegal finance.

By People's Daily Online

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