July 20, Since the People’s Bank of China announced on July 21, 2007 with financial institutions yuan upward benchmark deposit and lending rates. Financial institutions – year benchmark deposit rate increases 0.27% from the current 3.06% to 3.33%; one-year benchmark lending rate will increase by 0.27 percentage point, from the current 6.57% to 6.84%. (News)

Earlier, the National Bureau of Statistics released the first half of macroeconomic data have been unequivocally shown interest rate increase is urgent and necessary. CPI up by the first half of 3.2%, which in June increased by 4.4%, has exceeded the warning line set by the central bank.

CPI related explain the “excesses” performance does not mean that China has a clear inflation, he called “the result of price increases” that is the main food-driven price hikes. In the first half of the CPI rose 3.2%, food prices contributed to the 2.5 percentage point. In other words, if deducting food, the other items CPI rose only 0.7%. In the food “increase in the price of power system” is meat, eggs, food played a major “role” Poultry products rose 20.7%, egg prices rose 27.9%, food prices rose 6.4% over the same period last year. Meat and egg prices rose mainly because of the consumption of meat, poultry, eggs on the increase. It is gratifying that Prices of basic industrial goods remained stable (meaning to the CPI and PPI is the transfer is on the decline), and raw materials, fuel, power purchase price inflation also dropped. This seems to suggest that the increase in the CPI does not have sustainability.

Indeed, pork prices soaring prices of reason. main reason is not all people in recent years, suddenly become more like eating meat; it is not done with a lot of food items biofuels (ethanol projects on food consumption has been exaggerated. We biofuels on the input); is not because foreign workers wages suddenly became higher; or pigs more vulnerable than before, it is easier for sick (blue ear disease epidemic). But because China’s currency is put too much (money growth rate too high), inflation has not curbed “occurred.”

Chinese-style inflation pattern is very interesting, at the beginning it reflected in asset prices, especially in the real estate market, made only during the course of a year, China’s frontline city housing prices increased nearly doubled. Then, it is now exaggerated surface of meat and egg prices. Frankly speaking, Chinese-style inflation on the community’s role is not uniform, the objective impact, In fact, it has some kind of “robbing the poor to feed the rich” – the characteristics of inflation, it “upgrade” of the housing market prices, forcing low-income people to “leave”; then create a basic diet of “expensive” and detrimental to low-income persons.

As for why the price of industrial products and raw materials, fuel, power purchase price inflation down? The reason is very simple. China is because the low interest rate policy of “subsidies.” We take the analytical tools of Austrian School Rothbard’s thinking. Rothbard is very clever answers to why “cheap and easy monetary policy tends to create a bubble in real estate and the basic commodities soaring, However, industrial products, often showing little increase in the situation? “That is because of China’s low-interest rate policy is one of the specialized nature subsidies “industrial products.” China has been using cheap capital usage prices (low interest rates) “subsidies” of “industrial production conduction chain” on the next You interests. Transduction chain upstream It is not only the increase in the price of the enjoyment of profits from they also enjoy cheap capital of the “subsidy” effect. These production of raw materials, fuel and power enterprises will be willing to control price increases (to achieve more competition), and sold to downstream industrial enterprises in the chain.

For the downstream businesses, as long as the bank lending rate to below upstream products price increase. so wantonly to borrow from the bank is very affordable because of low-cost funds can offset raw materials, fuel, power purchase slight increase in prices, and even those poor downstream of the main forces have launched a new “price war” lead to the end product prices very low, resulting in the production of excess production capacity. Sometimes, some unwise to give the wrong impression to economists, to think that inflation is a distant and unrealistic. that the excess production capacity indicates the future deflation.

Undoubtedly, the central bank’s interest rate increase is necessary, timely and wise.

Copyright Fund China 2009.

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