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Will they or won’t they?

By  David Swartzentruber
AseanAffairs     13 December 2010

Observers speculate that the reason China is holding off the interest rate hike is to forestall an increased flood of capital inflows (hot money) into the Chinese economy. However, that may up pressure for an increase early in 2011.

a former deputy governor of the central bank, Wu Xiaoling, cited the risk of more capital inflows, adding that “excessive money supply is one of the important reasons for China’s inflation.”

Funds are flowing into China because of monetary easing in developed economies and the strength of the nation’s recovery, along with forecasts for higher rates and a stronger yuan. Surpluses in trade are also bringing in cash from overseas, with figures last week showing a $22.9 billion total for November. Liquidity is also buttressed by continued growth in credit, with banks lending 564 billion yuan last month.

The central bank has raised rates once since December 2007, pushing the benchmark one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent. Across Asia, India has moved interest rates six times this year, Malaysia three times and South Korea twice.

Instead of raising rates, China’s policy makers have siphoned money from the financial system over the past two months by setting higher reserve requirements for banks.

Delaying the use of the interest-rates and the exchange- rate tools may lead to a difficult correction later in 2011.

By

Paul A. Ebeling, Jnr