Tuesday, December 07, 2004


Details, Details: China & Interest Rates

One last China/economic post before I call it a night. I've been seeing a few sites comment on China's recent rise in interest rates (a piddly quarter point, actually) as being needed to cool China's economy. But I sure wouldn't count on it having that effect

When the rate increase was announced, it got all the attention, mostly cuz we can relate. But the bigger item that day (at least I think it was the same day; I'm going from memory here) was a change in policy, one that will have quite the opposite effect to the rate hike:

The PBOC (Peoples Bank Of China) eliminated the caps on lending rates.

Sounds dull and obscure? Not if you realize what this means. Before the change, Chinese banks could only charge customers no more than 1.7 times the official lending rate. So only the biggest, most connected customers could borrow money that way. Small businesses had to make do elsewhere, such as loan sharks on the black market.

But now, these same small businesses (and individuals, too) can borrow from the bank. The net effect is that, for the big state-run enterprises, the cost of capital went up a quarter of a point. For everyone else, it just went down a lot more. The changes will speed China's economy up, not slow it down. [Other factors such as higher costs for energy, commodities and transportation might be slowing things down, though, which perhaps explains why the PBOC acted as it did]