Economic data coming out of China on Thursday would partly explain why China’s macroeconomic authorities chose to surprise, many said “spook”, global markets with a 25-basis point rate hike on Tuesday. Many analysts believe that China may report better-than-expected growth numbers and higher-than-expected inflation numbers. With an intent to cool down a potentially overheating economy, China’s policy-makers may have taken this surprise decision. The so-called “surprise” in the rate hike decision was for two reasons: first, that China had not touched rates for close to three years and there were no indications it would; second, China had been resisting western calls for yuan appreciation and so this move was not anticipated because it would have the effect of aiding the yuan’s appreciation. There would be several other reasons behind the rate hike. Some knowledgeable analysts with an eye on geo-economics and strategy see the rate hike as yet another snub to the United States. That is, since there is no automatic transmission of the rate hike impact to the yuan’s exchange rate, given that the yuan’s exchange rate is officially determined, there is unlikely to be the latter impact of the rate hike forcing an appreciation of the yuan. Rather, the rate hike may become a substitute for yuan appreciation inasmuch as it addresses the problem of over-heating at home, curbs domestic demand and enables Chinese authorities to deal with high growth, rising commodity prices and inflation without yuan appreciation. If this argument is valid, then the strategy is “cock a snook”!
Whatever the factors that may have shaped the rate hike decision, the 25-basis point increase has had a global impact. Currency, commodity and equity markets around the world have responded to the rate increase showing once again the globalisation of the Chinese economy and its importance for global growth. What the decision also points to, and coming as it does days after the annual meetings of the International Monetary Fund and days before the G20 Summit, is that China intends to do whatever it thinks is in its best interests without worrying too much about what others say. Of course, its defiance is within limits, given that China has allowed yuan appreciation even if not at the pace at which the United States would like it to move. In fact, China’s 3-5 per cent rate of appreciation of the yuan is way below the 20 per cent that the US demands and the 10 per cent that players like George Soros seek. But the direction is set. Chinese authorities have also let it be known that China intends to cap the current account surplus to gross domestic product ratio at 4 per cent for the next three years, down from the 6 per cent and 7.5 per cent highs of the past few years. The full impact of the Chinese move will depend, however, both on real economic indicators coming out of China this week and the US response to them.