Start the conversation
By Mike Caggeso
For the sixth time this year, China raised interest rates to temper the fastest inflation the country has seen since 1996.
Effective tomorrow, the People's Bank of China will raise the benchmark one-year lending rate 18 basis points to 7.47%. The one-year deposit rate will also increase 27 basis points to 4.14%.
China's consumer price has grown 4.6% this year, and its key Shanghai stock index has more than doubled. And while the stock index cooled in November, CPI rose 6.9% last month.
"Inflation expectations are rising and the central bank really needs aggressive action to cool them," Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai, told Bloomberg. "They will get even more aggressive from now on."
China originally set an inflation target of 3% for 2008. However, that target was abandoned and the government has established new goal of keeping inflation under 2007 levels, Reuters reported.
Curbing inflation is especially tough in China because soaring food prices are a large part of the problem. In fact, China's ravenous appetite for all commodities has fueled inflation around the world. Smart investors have capitalized on the opportunity while others were left forking over more money for their gas, milk and bread.
To be sure, the tanking dollar has also contributed to China's inflation by hiking up the price of American goods sold overseas. But food is the primary catalyst.
If it's going to adjust, China will have to increase its domestic supply of food to take pressure off other countries and, like India, establish organic growth. This represents a great opportunity for rural China to profit from urban China's growth.
A day before raising interest rates, the government announced it would double the subsidy to $13.56 (100 yuan) for every fertile pig produced domestically. That decision won't become official until next year's State Council executive meeting.
Beijing also plans to spend $339 million (2.5 billion yuan) to help breeders build "standardized, large-scale" pig farms, Xinhua reported.
News and Related Story Links:
- Money Morning:
Soaring Oil Prices Spell Trouble For Emerging Markets