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The Bloated Dragon

January 12, 2011
By: Fran Howard, Contributing Writer
The Bloated Dragon

China’s central bank raised key interest rates recently in an effort to slow down the hottest economy the country has seen in years. As a result, investors scrambled to find a safe haven for their money, which they found in the U.S. dollar, and prices on commodities of all types tumbled.

The moves also set off fears that it could be the first in a series of rate increases as Beijing tries to tame inflation and curtail economic growth. Concern about what that would do to world commodity prices has been escalating ever since.

Fading impacts from an earlier economic stimulus package appear to have already helped moderate growth in the world’s most populous country (1.32 billion people). However, concerns about future interest rate hikes persist.

According to a recently released World Bank report, China’s gross domestic product (GDP) slowed from a 10.6% gain for the first half of 2010 to a still strong 9.6% increase for third-quarter 2010, compared with corresponding periods a year earlier.

The report’s lead author and World Bank senior economist Louis Kuijs expects China’s 2010 GDP to grow 10% but sees 2011 growth moderating to 8.7%, with possible easing in subsequent years.

China By the Numbers

The World Bank also recently decreased its 2010 projection for China’s consumer price index (CPI), a measure of inflation, to 3% from 3.7%. However, the World Bank raised its forecast for 2011 inflation to 3.3% from its earlier 2.8%.

Kuijs argues that a 3% to 5% rate of inflation in China is not all that worrisome. Other economists say they aren’t so certain.

“China would like to have inflation closer to 3%,” says Bill Lapp, former chief economist for ConAgra Foods and current president of Advanced Economic Solutions LLC in Omaha, Neb.

China’s October CPI figures (the latest available) rose 4.4% above year-earlier levels, but food prices rose 10.1%.

Currency Connection. One of the biggest issues causing mayhem in commodity markets today is the immediate link between the Chinese yuan and the U.S. dollar, which virtually move in lockstep.

Thus, Lapp compares the relationship between China’s monetary policy and U.S. economic policy to tandem bicycle riders, with one pedaling furiously to get ahead and the other slamming on the brakes.

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