This story–China’s growth accelerates to 10.7 percent in 4Q–creates some curious reactions in world markets. Asian stock indexes went down, and the US dollar rose to a five-year high. The funny part is that the good news also brought renewed expectations that China would raise interest rates and tighten money supply growth. Inflation is feared, apparantly more than a reduction in the rate of growth.
Strong Chinese growth could help to drive a global recovery by boosting demand for foreign oil, consumer goods and other imports. It also might give Beijing confidence to ease currency controls and allow its yuan to rise against the dollar, which could boost imports by making them cheaper for its consumers. China has kept the yuan steady against the dollar since late 2008 to keep its exporters competitive abroad.
But that progress could be derailed if a burst of inflation saps the spending power of Chinese families and forces the government to clamp down so severely on credit and investment that it slows the creation of new jobs.
So the expected increase in interest rates explains the lower spending expectations in the rest of Asia, but that would normally make the currency stronger against the dollar. Must be that the “confidence to ease currency controls,” is seen as a stronger influence.
Myself? I doubt it. For years China has been able to keep the Yuan relatively low through currency purchases, and still manage inflation domestically. Like mentioned later in the article, most of China is still a developing country.
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