How Much Smarter Can the Chinese Get?

This morning, unexpectedly, China raised interest rates. The People’s Bank of China (the central bank of China) raised rates 27 basis points on loans to 5.85%. This is the first time China has raised interest rates since 2004.

The Chinese economy grew at a whopping 10.2% in the first quarter of this year. Investment in factories and roads jumped 30% in urban areas in the first quarter. It is said that China has the fasting growing economy in the world.

But, this is just how smart the people running China’s economic machine are: While China announced this morning it was raising rates on loans, it left rates on deposits unchanged. Hence, if you want to borrow money in China, the one-year lending rate is 5.85%. But if you want to deposit Chinese yuan in Chinese banks, you’ll only get 2.25% on your money–the deposit rate was left unchanged.

Why? My bet is that the Chinese government does not want the yuan to be an attractive currency. Low rates of returns on currencies do not make them attractive. No. The Chinese would much rater have a strong U.S. dollar because they export so much to America. Smart move.

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China now joins North America and Europe in raising interest rates this year. The pressure in now on Japan to rates. and I believe they will.

China has given a clear message–they want to keep growth in control; they will raise interest to cool the economy; they want to keep the value of the Chinese yuan down. They have also given another clear message: China will raise rates although inflation is under control. China’s inflation rate is expected to be only 2% this year.

It’s official now. Interest rates all over the world are rising. Although the U.K. was the first to raise rates a couple of years ago, the U.S. was the first industrialized country to aggressively raise interest rates. The U.S. will also likely be the first country to stop rate increases. Hence, I’m only forecasting a couple of more U.S. Fed rate hikes before the Fed takes a break raising interest rates so they can see what effect the higher rates will have on the economy.