China Interest Rate Hike and Investment Growth

March 23, 2007 - by Stan
I'm several days late on this story, but such is life. This is a complicated issue, so some background reading is a good idea. A good post on China Economics Blog is a start, and it contains excerpts of a Financial Times article on the subject as well.

My take on the subject follows along the lines of "The question is how many more rises will be needed and what will happen to growth?" In other words, the specific merits of this interest rate hike may be debated, but this is not so important. What prompted this action (excessive investment), and the fact that this is neither the first rate hike nor the first policy designed to slow things down, are serious issues.

I note the comments by Wen Jiabao referred to in the FT article, which stated that China's Premier has recently expressed concern that development in China was becoming unsustainable without significant change. The rate hike is another piece of evidence that existing levers (reserve requirement, restrictions on land transfer, new approval procedures for certain investments) are not working so well.

So the question this all leaves me with is the following: is the problem based on the policy, on implementation, on the inability of these economic tools to move things in the right direction, or on the need to develop new tools?

The longer this overheating is allowed to go on, the more dangerous the situation becomes. No one wants to wake up five years from now in a country filled with steel factories and shopping centers, but with no sustainable engine for long-term development.



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