Views from the East: Chinese Commentators on the Interest Rate Hike

By Ruoji Tang
Published: 2010-10-22

The People's Bank of China announced on Tuesday evening that they would raise official interest rates a quarter of a percentage point (0.25) effective of October 20.

The announcement generated quite a response from both domestic and foreign media, many of whom were caught off guard by the unexpected announcement.While the international community seems to be concerned about the impact that the move might have on trade flows and the value of the yuan. The Chinese public appear more worried about what the rate hike will mean for their country's future development and their own hip pocket or man bag.
Raising interest rates is a commonly-used monetary policy technique that's usually implemnted in order to curb inflation.
But is it the right move at this time?

What does it mean for China's economic growth? How will it affect the household finances of average families? Are higher interest rates the cure for China's real estate bubble?

Over the past few days, China's columnists, economists and other experts have all attempted to answer some of these questions. Below we offer brief and selective translations of their analysis:

Sun Jianfang (孙建芳)from the Economic Observer writes:
"This indicates that the government currently believes that the economy will not face any risks. The negative consequences of the interest rate hikes are: the RMB already faces pressure to appreciate and higher interest rates will lead to an even greater influx of 'hot money' in China."
"... what can be confirmed is that the central bank's future regulatory actions will be more flexible. The bank may raise interest rates, they may increase the flow of future foreign investment, or they may lower interest rates when it is clear that the funds outstanding for foreign exchange reserves begin to increase ... However, the market is not entirely suited for the central bank's quick and flexible strategy."

Political commentator Li Wei (李炜) of Phoenix TV lays out what the interest rate hike means for the public:
"The interest rate hike is a double-edged sword."

"The general public will see this in terms of everyday life ... Interest rate increases are good for savings, money in the bank not only does not depreciate, but the depositer gets additional income. But it is not good for spending. More and more people are buying houses with mortgages, and people paying off mortgages know that if interest rates don't go up, they would only have to come up with seven hundred or so yuan in interest. But because of the interest hike, they will have to come up with an extra 100 yuan or more."

"But this time, it gets more interesting. Usually, after interest rate hikes, the interest gap between the RMB (also known as the Yuan) and the dollar increases. Since the interest rate that investors holding RMB can earn is higher, people are likely to increase their RMB deposits and reduce their dollar holdings, putting pressure on the RMB to appreciate. But it's interesting this time because people are not worried about the interest rate differential; they are worried that if the RMB appreciates, then China's economy will not be as strong, and therefore they are turning to other, low interest-rate currencies. This is a relatively new development."

Well-known economist Ma Guangyuan(马光远),who often writes for the China Business Journal, Southern Metropolis and The Beijing News, says in an interview with China National Radio:

"The interest rate increase is aimed at countering domestic inflation, and also at the housing bubble."
"But as far as impact is concerned, it's only a 0.25 percentage point increase, so it seems more of a symbolic gesture. It's meant to send a signal."

"I think the interest rate hike will mainly have an impact on public confidence, in that, we will be expecting to see results ... we will probably see by the end of the year if raising interest rates has had any impact on the housing market, but as far as changes in prices, and the general atmosphere surrounding housing speculation, we will have to wait until after the Spring Festival."

While Wei Yahua(魏雅华) from China Youth Daily writes:

"Do not underestimate this 0.25 percentage point interest rate increase; this isn't a small figure for the real estate market and the properties priced at several million yuan. Prices are still rising. But it is possible that this move will mark a turning point for the housing market."

"On September 13, the National Bureau of Statistics announced that in August, China's CPI hit a 22 month high of 3.5 percent and this might even trend higher in September. Interest rates will grow, but it's only at 2.5 percent right now, it should be higher than the CPI. Growing prices are bad for consumers, but they're good for industry. Higher prices mean industries can increase their rate of operation and employ more people and lift wages too. So maintaining price increases, to some degree, can be a good thing."

"Increasing the interest rate is an indicator of economic recovery ... From 2008-2010 China's economic policy has been focused on responding to the global financial turmoil, functioning like a blanket that has kept us warm throughout the winter. But now ... the spring is here".
"The prices of electricity, water, grain, meat and eggs are all rising. High interest rates can help buffer the effect rapidly rising prices can have on our wallets. How is this bad?"

Dou Hanzhang(窦含章) of Xinhua News Agencies Online Opinion Department, outlines his opinion in the China Securities Journal:

"In the debate about interest rates, some argue that we should wait and observe changes in the CPI and only then decide if and when to raise interest rates. This view, although seemingly reasonable, will also postpone any of the effects of an interest rate hike ... China has always looked to the CPI when deciding on the timing of interest rate movements, but it is a highly imperfect indicator. First, CPI lags behind real-time business activity. Second, it does not cover all domestic activity."

"Moreover, raising interest rates is mainly a preventative measure; if quickly implemented, it can prevent the economy from overheating and nip inflation in the bud. Once inflation has already reached a certain point, interest rate hikes will not curb inflation. In fact, if the rates are high enough, they might even lead to economic collapse. Raising interest rates is a vaccine - not an emergency cure for inflation."

Finally, sociologist Liang Fafu (梁发芾)argues in an op-ed for the Western Daily that:
" ... Recently, the economist Li Yining said something that's very interesting. He said we can let inflation rates [currently at 3%] rise to 4 percent or even 4.5 percent, as long as it is good for economic development ...  True, society might be able to accept 4.5 percent inflation, but ordinary people can't. Incomes are low and many people have not had a raise in years. But prices continue to rise, which means that the money they earn is worth less and less and that they can't afford to buy as much. Does this make sense? Is this just?"

"The government cannot ignore the needs of ordinary people. Raising interest rates is a start ... Hopefully, it will be effective in curbing inflation."