Rising Interest Rates Could Affect China’s Booming GDP

The economy in China continues to sizzle. The trend of high GDP growth has been quite impressive. Wall Street powerhouse The Goldman Sachs Group, Inc. (NYSE/GS) just came out and predicted that China’s gross national product (GDP) would rise 12% in the third quarter of this year, well above what other pundits predicted.

Goldman said the strong surge in the Q3 GDP would be driven by industrial production along with fixed asset investment. Given this, higher interest rates are expected down the road, which Goldman believes could lead to a nine-percent rise in the Chinese Yuan within a year.

The astounding growth for China is seen as successful by the government, as it helps to build the country and bring it in line with the Western countries. But the growth could also prove to be a double-edged sword, because of its impact on inflation. In May, inflation in China came in at a high 3.4%, which is above the government’s targeted inflation band with an upper limit of three percent. I expect the People’s Bank of China to deal with the inflationary pressures, which could see another rate increase.

If you invest in China, you need to be extra cautious. The country is booming on all fronts. Demand for products and services continue to be there, but if interest rates continue to rise, this can lead to a decline in spending and could negatively impact the extraordinary construction sector. If the construction sector falls out, we could see a mad selling frenzy in real estate.

In addition, there is a lot of financial risk in the country’s banking system. I’m not saying it is a bubble waiting to burst, but if Chinese authorities are not careful, it could happen, and it would impact investments in Chinese stocks.