There was an onslaught of news today, but one story got lost in the shuffle – the Chinese raised interest rates for the first time since 2007. This is a very real signal that they are concerned about overheating. From Bloomberg:
“China would be wise to raise rates,” Dariusz Kowalczyk, a Hong Kong-based senior economist at Credit Agricole, said ahead of today’s announcement. “It has led the global recovery and yet is one of only a few emerging Asian nations that have not begun to reverse the steep rate cuts orchestrated during the crisis.”
Chinese officials are grappling with the risk created by last year’s record 9.59 trillion yuan ($1.4 trillion) credit
boom that fueled the nation’s comeback from the global recession. China’s property prices in 70 cities rose 9.1 percent in September from a year earlier, according to the statistics bureau.
China will speed up the introduction of a trial property tax in some cities and then expand the levy to the whole
country, the government said Sept. 29, without giving a timetable. The state also told commercial banks to stop
offering loans to buyers of third homes and extended a 30 percent down payment requirement to all first-home buyers.
These sorts of actions are certainly going to put a damper on economic growth in the coming months – a necessary step in containing larger problems, but also a near-term headwind. Morgan Stanley has previously provided the historical playbook for a tightening phase:
Eswar Prasad, a senior fellow at the Brookings Institution and a professor at Cornell University provided some excellent insights on the situation:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.