China Inflation rises
CNNMoney- Sept 12, 2010
China CPI rises to 3.5% in August from 3.3% in July this year. This is almost 3 folds that of the US, which rises only 1.2% over the twelve-month period ending in July.
Inflation is good indicator of economic growth, however, growing at a breaking 3.5% in August might need to be met with some caution.
According to the site, food prices in China have risen 7.5%., which demands for a rise in workers' wages to accommodate the high price shoot in necessary goods.
Economic analysts says that China may rise its interest rate, but more symbolically than substantially to match its economic growth.
High interest rate will encourage saving and deter investment, thus slowing down the economy. However, I don't understand how raising the interest rate will help, will somebody help me?
Raising the interest rate will encourage people to put their money in a bank instead of spending it. I have read a lot about the inflation problem in China, especially the real estate bubble. Chinese banks are also lending out funds to risky investments and not keeping enough money in reserve. If the real estate bubble pops their economy will be in a lot of trouble - but so will the whole global economy.
ReplyDeleteI understand that raising interest rate will encourage people to save more. But how about investment? It will go down as interest rate hikes up- and I don't think that's a good thing. And what really happens if, like you say, China doesn't have enough money in reserve and its economy will pop? What is the crash of the economy look like then? I am interested to learn about that situation.
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