If you think China’s booming economy is slowing down due to the Chinese government’s recent measures to dampen growth, think again.
China, the world’s fourth largest economy, continues to grow at a superlative rate, despite recent actions to try to slow down the country’s economic growth. The country has increased its interest rates marginally, made obtaining credit a little more difficult, and controlled the expansion in the real estate sector. China saw its economy grow by 10.2% in 2005, above the previous estimate of 9.9%, according to the National Bureau of Statistics.
Adding to this growth is the recent upgrade by the World Bank, which increased its GDP estimate for China to 10.4% for this year — well above its previous estimate of 9.5% in May. The World Bank also raised its GDP estimate for 2007 to 9.3% from 8.5%. The rising trend of higher economic growth in China is great for business, but the country needs to be careful of the growth’s impact on inflation.
The Chinese central bank has raised its key one-year benchmark rate twice this year, and it now sits at 6.12%. Several months will go by before we see if the higher rates can translate into slower growth. If not, China will need to increase rates again. Whether or not this is the start of a new upward trend is still unknown, and ultimately any trend forming will likely depend largely on GDP growth going forward.
Raising Chinese interest rates will also help drive up the value of the Yuan against the U.S. dollar. This move should help to moderate the climbing U.S. trade deficit with China.
In my view, it is clear that China needs to balance its stellar economic growth and inflation very carefully. The country believes it can reduce poverty through wealth creation, and the consensus is that as long as inflation doesn’t surface, China may allow its economy to continue to grow at the current pace.
At this time, for investors, China remains a good place to have some capital.