By China Economic Review
I was on a flight to Shanghai last week and sitting next to me were two ladies from Taiwan who spent the entire flight poring over a sheet showing the Hong Kong Mark 6 winning numbers for the past 100 draws or so, and working out the next likely sequence.
It was a highly scientific discussion, with cross references to previous trends, detailed probability analysis, and a stab in the dark and what numbers might appear next. In other words, they were absolutely mirroring the activities of thousands of economists and analysts around the world trying to divine where China’s numbers are going – interest rates, GDP growth, RMB rate. And in all likelihood, with the same probability of success.
Just as two months ago, the speculation on China’s plans with regard to the renminbi exchange rate kept the markets alight, and analyst reports full of words, so now the topic is interest rates. The speculation is on when the PBOC will raise interest rates and by how much. As usual, the analysts are right in terms of the pressures on the Chinese economy, but they are, also as usual, predicting what course of action the Chinese authorities will take based upon their own instincts.
One of the key points to keep in mind with Chinese officials is that if they can at all find a justification for taking no action at all, they will do so. It is only with great reluctance that they shift something fundamental like interest rates or the renminbi exchange rate, because they are at heart control freaks and they like to be able to predict the consequences of any action or non-action with a high degree of certainty. They decided not to devalue in the late 1990s because of a fear of the wider consequences for the economy. They faced down revaluation pressures earlier this year for fundamentally the same reason. They will delay any change of interest rates for as long as they can on the same logic.
Changes will come, of course, but look for incremental rather than shockinducing. And anyway, the latest indications are that the economy is responding well to the initial credit-tightening, inflation-dampening measures. It could be the bureaucrats will get through this period without having to do anything drastic at all.