It didn’t take long for the Chinese Government to act to try and further control an economy which is starting to look like it is getting out of hand.
Interest rates have been increased to an eight year high after a string of official figures last week revealed an economy growing much faster than the eight per cent target suggested by the government at the recent People’s Congress.
Last week we had strong retail sales figures for the country for January and February, news that the trade surplus in February skyrocketed to more than $US23 billion (the second highest on record) and then a report revealing that industrial production also rose sharply in the first two months of the year.
We’ve had a nasty stockmarket bubble which is worrying countries around the world, inflation is now above the authorities’ comfort zone and even though industrial investment seems to be easing, the government Friday revealed the third increase in official interest rates in a year.
(A bit like Australia and New Zealand, except the magnitude of the situation in China is many times larger with faster growth and a much larger economy: what could be on the verge of being the world’s third largest economy in the next couple of months.)
China’s one-year benchmark lending rate will be raised to 6.39 per cent – the highest in almost eight years – from 6.12 per cent with the high rate kicking in immediately.
The move follows similar announcements in April and August of last year. Last month it also ordered banks to set aside more money as reserves for the fifth time in eight months to rein in the money supply and cut back lending for new business investment.
Commodity prices will take a hit from the news after a very sharp rise in copper prices on Friday as world stocks continued to fall on renewed Chinese buying of the metal.
Normally a rise in copper prices would be bullish for the Australian market with BHP Billiton and Rio the leading stocks to benefit: but the rate rise in China and the continuing signs of an economy starting to get out of hand, will force some analysts and companies to have a second look at the situation.
China is still growing but there are now concerns that it is growing too quickly for the country’s economic health and for trade and political reasons: there are growing suggestions the Democratic-controlled US Congress is becoming more protectionist and might start pushing for levies and other trade barriers on imports from China.
The final straw seems to have been figures late last week showing that the country’s industrial production accelerated in the first two months: production rose 18.5 per cent in January and February, according to China’s National Bureau of Statistics. That was after a 14.7 per cent increase in December.
The trade surplus rose from $US2.5 billion in February 2006 to a massive $US 23.8 billion last month and second only to the record of just over $US24 billion last October.
The growth in China’s money has jumped to its highest rate in half a year and inflation hit an annual rate of 2.7 per cent in February from 2.2 per cent the month before.
The big fear is that the Chinese economy has moved into hyper drive and the only way it can be slowed is by an officially engineered crunch.
But the odds of the three rate rises being enough to do that are not good. There’s a bubble in industrial investment, a bubble in the stockmarket and both place added pressure on the government’s ability to rein in the madly charging growth machine.
There’s growing concerns the higher trade surpluses are being recycled back into China to finance the expansion in investment (a glut in capacity in many industries is looming) and the surge in the stockmarket, especially since January (and including last month’s sharp fall).
Official figures released a couple of weeks ago show that an estimated 60 per cent of 600 consumer items in China are in oversupply because of too much production, not too little demand.
Consumers it seems are just being overwhelmed and the surplus is being shoved on to the export market to try and clear inventories.
Is China’s economy getting out of control and starting to overheat?
