This morning’s interest rate hike out of China certainly won’t crash the economy. According to Citi’s Minggao Shen, even 175 basis points over the next two years won’t slow down China.
Shen wrote in an end-of-year note: “[E]ven with our benign inflation forecast and aggressive rate hike expectations, real 1-yr deposit rates would stay negative until early 2012… Thus, without appropriately high interest rates, efforts to fight consumer and asset inflation would be significantly discounted.”
Risks of hyperinflation and social tension won’t go away, but the stock market will keep rising.
Shen identifies 5 key drivers of Chinese growth. These are: inflation, liquidity, valuation, the US dollar, and earnings.