Chinese raise rates to beat inflation

China raised interest rates last week in response to high inflation, despite economic growth slowing to 9.6% in the third quarter, according to preliminary estimates published by the National Bureau of Statistics of China.

In a surprise move, the Chinese central bank pushed one-year repo rates from 5.31% to 5.6% as its economy began to show signs of overheating in the wake of a global currency war. Inflationary pressures, exacerbated by America’s intention to start a second round of quantitative easing, have also intensified.

GDP growth meanwhile fell back to single digits, from 10.3% in the second quarter and 11.9% in the first quarter. China’s GDP was RMB 26.9 trillion (£2.6 trillion), a year-on-year increase of 10.6%. (article continues below)

Although quarter-on-quarter growth has slowed, growth is still 2.5 percentage points higher than in the same period last year.

However, pressure on China intensified last week when Timothy Geithner, the American treasury secretary, told the G20 nations to stop manipulating their currencies, despite money-printing policies in America and currency pegs in China.

The Obama administration, which has repeatedly told China to let its currency appreciate, last week warned countries to cap current account surpluses or reduce deficits to rebalance the global economy.

Indeed, much of the attention in the west has been focused on how to avert a global currency war and on Chinese policies to promote economic growth.

Andy Xie, an independent economist based in Shanghai, says China’s real problems lie elsewhere. “China’s issue is not that growth is slowing down,” he says. “The currency is only a big issue for foreigners, which is complicating internatio­-nal relations.”

He is more worried that the economy is “very overheated” and plagued by rapidly rising inflation.

“China is trying to cool the economy by gradually restricting lending and raising interest rates, but this is not enough,” Xie says.

Economists’ concerns over bubbles in China have increased. Diana Choyleva, a director of Lombard Street Research, wrote in a daily note last week that China’s economy is overheated, necessitating growth well below trend to cool it.

Choyleva says suppressing domestic demand as China done so far, using administrative measures as well as rate rises, has angered America, which wants faster appreciation of the renminbi.