My original topic for this column will have to be delayed for another time as I am compelled to focus on the Chinese central bank's announcement on Friday of a second raise in interest rates in a month.
The People's Bank of China raised the benchmark one-year lending and deposit rates by 0.27 percentage points. This means the one-year lending rate has increased from 7.02 percent to 7.29 percent, and the deposit rate from 3.6 percent to 3.87 percent.
In less than a year, the central bank has lifted interest rates five times and also the amount banks must hold with the central bank, known as the reserve requirement ratio, seven times.
The central government, without a doubt, is doing the right thing to contain inflation, which stood at a bothersome 6.5 percent in August year-on-year, the fastest growth in a decade.
It will be interesting to see this time what the domestic stock market's reaction will be to the rates hike. Judging from what has been seen in the past, the nation's investment passion was not cooled, and banks, with their higher interest rates, hardly attracted more savings.
Especially now when the consumer price index (CPI) is high, what would be the point of people putting their money into banks?
They will still prefer to seek higher returns from various investment channels - and most likely from the stock market. But with the ample funds that they can raise from investors, or from exports, how can the publicly listed companies generate the expected returns - at a time when the central government no longer welcomes massive investment projects?
To be sure, there will be some large projects, such as power stations and other infrastructure developments. There will also be more expensive mergers between State-owned large corporations - issuing more stocks and raising more money.
But these things hardly generate direct sales unless the government price caps on most utility supplies are removed, something that Beijing would be reluctant to do for the sake of protecting low-income households and social harmony.
Of course, Chinese companies can continue to export to their traditional markets - North America, Western Europe, Japan and the rest of Asia. But the trend is that these markets are becoming more and more saturated, if not more restrictive.
In reality, there appears only three ways the Chinese can spend their money meaningfully. One is to learn to build things with new technologies and sell them at more competitive prices.
The second is to build more cities in the under-developed inland and frontier areas, to admit more rural people, giving them an urban lifestyle.
And the third is to learn to take advantage of the global opportunities. With the gradual increase in the value of the renminbi against the US dollar, it may be a good time for more Chinese companies to branch out overseas, as many companies from other developing economies are also doing.
But global opportunities should not only mean getting new natural resources, but more importantly, passing to the local people the Chinese expertise in turning out manufactured goods at relatively low prices.
History shows that every time the market crashes it is because too much money had been committed to too few worthy projects. China's development game can last only by allowing more people to join.
E-mail: younuo@chinadaily.com.cn
(China Daily 09/17/2007 page4)
