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Economics: China
Economics – Markets – Strategy
7.47% and 4.14% respectively, it is not unreasonable to project that hikes on
domestic rates will resume. We now look for hikes (27bps each) in 4Q08, 1Q09
and 2Q09.
If the priority is to tame inflation, raising interest rates to slow domestic demand
should be a more effective measure, the proven route taken in 1992-94. However,
CNY appreciation must be slowed sufficiently to around 3%-4% in 2009 to reverse
the ‘expectation factor’.
While this may be unappealing to both policymakers and investors right now,
the risk is that by not changing the policy mix sooner rather than later, the
inevitable hike may need to be greater than if rates are increased now. Indeed,
weakening domestic demand may yet prove to be the ultimate solution to the
ongoing inflationary problems in China.
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