Impact of China′s interest hike on Asian markets | Asia| An in-depth look at news from across the continent | DW | 21.10.2010
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Impact of China's interest hike on Asian markets

China’s hike in interest rates should not have come as a surprise to the world's financial markets. The hike has also affected Taiwan.

Headquarters of the People's Bank of China in Beijing

Headquarters of the People's Bank of China in Beijing

China’s decision to raise interest rates took markets by surprise on Tuesday, as prices for raw materials such as oil and gold plunged. It is the first time China has decided to raise rates in three years.

But while stock markets in the US, EU, Japan and Hong Kong wobbled and fell after the announcement was made by China’s Central Bank, the South Korean and Taiwanese stock markets appeared rather confident, closing higher.

Investments stay in the region

Like a Siamese twin, Taiwan is often affected by the economic decisions China makes. But Sun Mingde from Taiwan’s Institute of Economics does not believe this move is any cause for commotion in Taiwan.

China has refused to appreciate its currency, despite international pressure

China has refused to appreciate its currency, despite international pressure

"Other countries have already raised their interest rates. In Taiwan they have been raised twice this year, once in June and again in September. China is only keeping pace with other markets by raising their rates," he explains, "currently there is enough hot money in Asian markets. Investments are international, so whether they are in Chinese or Taiwanese markets, the main thing is the investments stay in the region. That means this minute increase of interest rates will have hardly any impact on the relations between Taiwan and China."

Preventing the speculative bubble

The slight hike in interest rates from the previous 2.25 to 2.50 is modest - it is an increase in one-year lending and deposit rates of merely 0.25 percentage points.

While some fear this could destabilize exchange rates and even export volume, which would be felt in most markets, the Chinese media is now busy spreading the word that the interest rate hike is meant to slow down speculative purchases in real estate and curb inflationary pressures.

Long-term effect

Zhu Haomin is a professor of economics at Taiwan’s Chengchi University. He believes skepticism is premature. While he agrees a direct impact might not be felt in Taiwan, long-term effects may be more relevant.

"Most would think that such a move would hurt market confidence, as could be seen on American and European stock markets. But look at China’s stock market. Luckily the values stayed put. If China’s stock market also falls, that could have a negative effect on other markets," Zhu says.

Investors waiting for their cue

So it seems in the grand scheme of things, China’s interest rate hike will not make much of a dent in the global economy. Not now, anyway, as Zhu Haomin emphasizes:

"China’s economic growth is steady but rapid. Of course it can't go on like this, salaries will rise as will the value of the RMB and production costs. That is not so good for the economy. There are sectors, the so-called low-end sectors, that are growing too rapidly in China, causing an imbalance in the system. But now the government has decided to upgrade them to high-tech, environment friendly sectors. But that could mean a decrease in exports and that would definitely have a negative impact on the global economy."

Meanwhile markets have bounced back after the initial shock of the rise in interest rates. But investors waiting for their cue, are keeping a watchful eye on the world’s second largest economy.

Author: Sarah Berning, Taipei
Editor: Grahame Lucas

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