The Risk Of A Bubble In China Is Real

Last month, Beijing released its June inflation and national trade account figures, with data suggesting that the government’s current measures to cool down its economy may be inadequate.

China’s stellar economic performance and astounding growth rates, even during the recent global and regional economic turmoil, have been seen as a pillar of support and point of reference for investor sentiments and many recovering economies around the world. China, however, continues its struggle in fighting inflation as it accelerated to a three-year high of 6.4 per cent in June.

In a bid to cool surging inflation, the Chinese central bank raised key interest rates for a third time this year. Benchmark rates for one-year loans were raised by 25 basis points to 6.56 per cent.

Additionally, the customs agency announced yesterday that China’s June import growth decelerated to 19.3 per cent, a sharp decline from May’s 28.4 per cent. June’s export rose by 17.9 per cent, hitting a record high of US$121.5 billion. China’s trade surplus widened by more than US$23.3 billion, increasing the amount of capital inflows and adding to the frustrations of policy makers.

So what do these figures mean?

With the slowdown of several key industries, fears are mounting that an interest rate hike might trigger a decline in the overheated Chinese economy. Analysts are already predicting another rate increase this year, raising doubts over the efficacy of contractionary monetary policies.

Despite the latest rate hike, China’s real interest rates, or inflation-adjusted interest rates, are still negative, encouraging the channeling of excess cash towards consumption and investment which can add pressure to stubbornly-high price levels.

With the US and euro-zone economies struggling with their own economic troubles, China has been an important engine of growth and many fear that a slowing Chinese economy might further exacerbate the problems faced in the West.

Read the full story by Michele Lin, on EconomyWatch: Is China Heading For An Economic Slowdown?

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