On April 27, China's central bank, the People's Bank of China, announced that the following day it would raise its one-year lending rate by 0.27 percentage points to 5.85 percent from 5.58 percent. This was the first hike since October 18, 2004, but it differed from the 2004 raise in that the deposit rate remained unchanged.
This move by the Chinese government was aimed at tightening controls on lending and preventing investment from rising too rapidly, without lowering consumption levels and attracting more speculative "hot money."
There are indications that the Chinese economy, despite two years of macroeconomic control measures, is still at risk of overheating. During the first quarter of this year, China's GDP and broad money supply, M2, grew by 10.2 percent and 18.8 percent, exceeding the expectations of the Chinese government by 2.2 percent and 2.8 percent.
China's banks have also extended new loans to the tune of 1.26 trillion yuan (US$157 billion) in the first quarter, accounting for more than half of the annual target of 2.5 trillion. In addition, the total investment in fixed assets has reached 1.398 trillion yuan, an increase of 27.7 percent over the same period last year.
The current investment rate is the highest since the Chinese government decided to open up to the rest of the world 27 years ago, and is even higher than the heady years of economic overheating in 1992 and 1993.
To effectively cool down the overheating economy, China's central bank has attempted to raise loan interest rates to increase the cost of capital, to reach the target of putting a lid on investment and suppress rapidly growing credit.
At the same time, it has kept deposit rates unchanged to keep domestic consumption from slackening and stop more hot money from flowing into China.
China's National Development and Reform Commission and the Ministry of Land and Resources recently released guidelines aiming to restrict the use of land and the granting of loans and prevent excessive growth in investments in some industries and regions.
The two agencies also issued guiding principles regarding structural adjustments for the cement, coking, ferro alloy and steel industries.
The inflow of foreign currency caused by the undervalued Chinese currency is a main factor behind the overheating Chinese economy. Since July 21 last year, when the government allowed the yuan to appreciate 2.1 percent against the US dollar, the yuan has only appreciated by another 1.2 percent. This has been insufficient to lower expectations on international markets that the yuan will further appreciate, which has led to continuously growing foreign exchange reserves. In the first quarter of this year, China's foreign exchange reserves increased by US$56.2 billion, US$7 billion more than in the same period last year. In February, China overtook Japan to become the world's biggest holder of foreign exchange reserves.
The excessive amount of foreign exchange is a serious threat to the independence of China's monetary policies and it also poses a great financial risk. Last year, the accumulation of foreign exchange accounted for 62.9 percent of the total increase in base money.
More troubling is that a lot of the foreign exchange flowing into China is international hot money speculating on the appreciation of the yuan.
In 2003, the amount of hot money flowing into China was US$82.8 billion, in 2004, it was US$114 billion, and last year, it was US$46.7 billion. Although the inflow of international hot money decreased slightly last year, it has climbed to US$18.6 billion in the first quarter of this year, accounting for 40 percent of last year's total.
On the whole, China's interest rate hike of 0.27 percent is unlikely to prevent China's economy from overheating, and it will instead highlight the predicament facing the Chinese government. It will lead to higher expectations for the yuan to appreciate and an increase in the influx of foreign exchange, which in its turn will lead to the continued overheating of the economy and a renewed pressure to increase interest rates and adjusting the exchange rate.
Until the imbalance in the exchange rate has been thoroughly dealt with, China can in the short term only continue to tighten policies and coordinate credit, administrative and land policy measures in an all-out effort to relieve the pressure resulting from the imbalances in the economy.
In the future, the Chinese government might raise the required reserve ratio by 0.5 percent to 1 percent in order to freeze 150 billion yuan to 300 billion yuan of bank capital. It might also raise the criteria for approving investments and the use of land, thereby accelerating the industrial structural adjustment and restricting the development of real estate.
It cannot even be ruled out that a moratorium on loans to overheating industries will be issued.
Tung Chen-yuan is an associate professor in the Sun Yat-sen Graduate Institute of Social Sciences and Humanities at National Chengchi University and director of the Cross-Strait Interflow Prospect Foundation's China Economic Analysis project. Wong Guo-chen is an assistant in the project.
Translated by Daniel Cheng
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
Since the Russian invasion of Ukraine in February 2022, people have been asking if Taiwan is the next Ukraine. At a G7 meeting of national leaders in January, Japanese Prime Minister Fumio Kishida warned that Taiwan “could be the next Ukraine” if Chinese aggression is not checked. NATO Secretary-General Jens Stoltenberg has said that if Russia is not defeated, then “today, it’s Ukraine, tomorrow it can be Taiwan.” China does not like this rhetoric. Its diplomats ask people to stop saying “Ukraine today, Taiwan tomorrow.” However, the rhetoric and stated ambition of Chinese President Xi Jinping (習近平) on Taiwan shows strong parallels with