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China rate boost may help US Original Source Link: (May no longer be active)
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China Rate Boost May Help at Home Without Hurting World Growth
Oct. 29 (Bloomberg) -- China's first interest rate increase in nine years may cool its economy without damaging global growth, economists and international policymakers said.
``They are obviously trying to have a moderating effect on their economy,'' Canadian Finance Minister Ralph Goodale said. ``While they would seek moderation, they are not attempting to impair what is a very buoyant economic situation.''
The People's Bank of China yesterday jolted global markets by saying it would raise the benchmark interest rates by 0.27 percentage point starting today, to 5.58 percent for one-year lending and 2.5 percent for deposits. Economists surveyed by Bloomberg News anticipate a series of rate increases totaling 25 to 200 basis points in the next year.
Raising borrowing costs is the government's latest measure aimed at restraining inflation now running in excess of 5 percent after the world's largest developing economy grew 9.1 percent in 2003, the most in seven years. China's economy accounts for about 12 percent of world output, double its input of a decade ago.
``I'm pleased to see them using market-based mechanisms -- interest rates -- to deal with these concerns of potential inflation,'' said Treasury Secretary John Snow, who this month hosted a Group of Seven meeting in Washington that included Chinese officials as dinner guests for the first time. ``They're moving more and more in the direction of more sophisticated market- based management of their economy, and I think that's a good thing.''
Market Reaction
After initial declines, U.S. Treasury bonds and currencies including the Japanese yen and the Australian dollar rebounded on speculation the benchmark rate increase won't slow China's economy enough to damp imports. China is the second-largest importer of Japanese and Australian goods.
The yen traded near a six month-high against the dollar at 106.19 in mid-afternoon trading in New York, while the Australia n dollar traded at 74.52 U.S. cents after dropping as low as 73,75 U.S. cents. The benchmark U.S. 4 1/4 percent note due in August 2014 was little change at 101 11/32 to yield 4.08 percent. Earlier the yield was 4.14 percent, the highest since Oct. 13.
``The increase is not enough to cool inflation,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. ``China has opened the floodgates to further rate increases.''
Kathleen Stephansen, director of global economic research at Credit Suisse First Boston in New York, predicts an eventual increase of 200 basis points, equal to 2 percentage points. David Malpass, chief economist at Bear Stearns & Co. Inc. in New York, predicted 1.5 percentage point.
Market Mechanisms
Until this week, China avoided raising borrowing costs, relying instead on government edicts such as lending curbs introduced in April to slow expansion in industries such as steel and real estate that inflated raw-materials prices and triggered power shortages.
Those measures worked to some extent. Inflation faded to 5.2 percent in September from a seven-year high of 5.3 percent the prior month and investment in factories, roads and other fixed assets grew 28 percent in the first nine months, slowing from 30 percent in the January to August period.
With monetary policy now playing a part, a further fading of growth is inevitable, said Nicholas Lardy, a China analyst at the Institute for International Economics, a Washington research institution. The International Monetary Fund last month projected growth of 9 percent this year and 7.5 percent in 2005.
``A slowing down is now in the cards,'' said Lardy, who also expects more increases. ``This is the first in a set of moves.''
Stephen Roach, chief economist at Morgan Stanley in New York, agreed there are ``other increases to come'' and declined to predict how much. ``This is good news for China -- good news in the case for a soft landing,'' Roach said.
Global Growth
The International Monetary Fund on Sept. 29 cut its global growth forecast to 4.3 percent for 2005 after reaching an estimated 5 percent this year, the most in almost three decades. The Washington-based IMF cited higher oil costs.
A weaker Chinese economy may eventually benefit growth internationally, especially in those countries such as the U.S. that rely on foreign nations for much of their raw materials, some economists said. Crude oil futures in New York surged 72 percent over the past year in part because of demand from China.
``China's been overinvesting and overheating,'' said Arun Raha, an economist at the Cleveland-based Eaton Corp., the world's No. 2 maker of hydraulic equipment, which has customers in China. ``Commodities demand will ease because China was a big source of that demand.''
Raha predicts China will raise rates another 25 basis points in the first quarter if the annualized rate of China's gross domestic product comes in above the government's target in the fourth quarter of this year.
``In the short run it will probably be a negative on global growth -- in the long run, it's more important as a positive economic reform,'' said Donald Straszheim, president of Straszheim Global Advisors Inc. in Santa Monica, California. Straszheim predicts a 100 basis point increase within a year.
Currency
U.S. Treasury Undersecretary John Taylor said by tempering inflation, the Chinese efforts to quell economic growth would also most likely mean a more sustained and balanced expansion in China and abroad. ``This increases the probability of continued expansion in China and globally,'' Taylor, the undersecretary for international affairs, in an interview.
Concern that a slowdown in China would hurt the world economy is ``over-rated,'' said Harvard University professor Kenneth Rogoff, who until last year was chief economist of the International Monetary Fund. Even if China's growth fell by a third, that would only reduce expansion in Asia alone by about a half-percentage point, he said.
The U.S. Treasury also hailed the higher interest rates as a step toward China ending its nine-year policy of tying the yuan at 8.3 to the dollar. The U.S. says this policy undervalues the yuan, promoting inflation and hurting U.S. exporters.
``These actions are part of that and consistent with China moving towards a flexible exchange rate system,'' Taylor said at a Bloomberg News forum.
To contact the reporters for this story:
Simon Kennedy in New York
at skennedy4@bloomberg.net
or
Le-Min Lim in Hong Kong at lmlim@bloomberg.net
To contact the editor responsible for this story:
Kevin Miller at kmiller@bloomberg.net
Last Updated: October 28, 2004 16:33 EDT
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