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China talks raising interest rate on inflation concerns

Scott Tong May 12, 2010
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China talks raising interest rate on inflation concerns

Scott Tong May 12, 2010
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TEXT OF STORY

Steve Chiotakis: Investors are keeping an eye out for another bubble. This one in China. Gas, food, and consumer prices are way up. So now, a key Chinese bank advisor says its time to raise interest rates. From Shanghai, here’s Marketplace’s Scott Tong.


Scott Tong: The central bank advisor says he frets about the danger of inflation. Consumer prices in China rose almost 3 percent in April, the most in a year and a half. Some call that a
“negative real interest rate” — bad for bank customers, bad for banks. Economist Paul Cavey works for a bank, Macquarie Securities:

Paul Cavey: Interest rates are very low in China. And therefore any rate of inflation already causes real interest rates to be negative. And that’s a strong argument for interest rates to rise.

Argument number two is home prices. Real estate prices sizzled up 12.8 percent over the past year, reigniting talk of a China housing bubble. If China does hike interest rates, some investors fear it’ll cool things down too much. That will hurt Chinese demand for things like American cars, iPhones and U.S. debt.

Economist Cavey thinks Beijing has another tool in the kit that it will employ very soon: strengthening the currency. That would make it cheaper for Chinese consumers to buy foreign goods, and moderate inflation pressure. One added benefit? It would moderate political pressure from Washington.

In Shanghai, I’m Scott Tong for Marketplace.

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