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Heading off inflation

(China Daily)
Updated: 2010-10-21 07:51

China has proved its increasing importance to the world economy by considerably jolting the world financial markets with its first interest rate hike in nearly three years.

The worldwide sell-off, following the announcement by China's central bank on Tuesday that it would raise key rates by a quarter percentage point, clearly revealed global concerns that higher rates could slow Chinese growth and thus impede global recovery. Given their high expectations of Chinese growth as a key driver of the global economy, such a knee-jerk reaction by overseas investors is fairly understandable.

However, such a cursory reading means that, those investors who see it as a sign that China's economic growth will lose steam soon, have significantly underestimated Chinese policymakers' resolution to fight inflation head-on.

If such a domestic-focused effort to thwart inflation can effectively prevent the Chinese economy from overheating, global investors should actually have more reasons to be optimistic about the world economy.

On the one hand, the straightforward effort to fight inflation indicates that Chinese policymakers are more confident about the country's growth momentum.

Though rising consumer inflation has already turned real deposit interest rates negative for months, it is believed that economic slowdown from the first quarter has largely prevented the central bank from increasing interest rates early.

The latest move suggests that Chinese policymakers may have obtained more compelling evidence of strengthening momentum on domestic demand.

On the other hand, in the longer term, more such interest rate hikes are needed to deal with the risk of a dangerous property bubble in China.

While the collapse of huge property bubbles have so far stopped a number of debt-laden rich countries from emerging from the worst global recession in more than half a century, no one should expect another property bubble to also derail China, a powerful locomotive for the world economy, from the track of fast and stable growth.

Compared with those targeted measures that the Chinese government adopted earlier to contain a further rise in property prices, the interest rate hike looks like a much more direct and effective move to cool the real estate market.

China's success in avoiding a property boom-bust of its own will not only determine whether it can build itself a moderately well-off society in the near future, but also reshape the way the world economy emerges from the global crisis.

It is far too early to tell if China's latest interest rate hike will be enough to tame the rise of domestic consumer prices and asset prices, given that super loose monetary policies in developed countries are flooding emerging markets with excess liquidity. But the resolve to take action against inflation is definitely more than needed.