Heading off inflation
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China has proved its increasing importance to the world economy by considerably jolting the world financial markets with its first interest rate hike in nearly three years.
The worldwide sell-off, following the announcement by China's central bank on Tuesday that it would raise key rates by a quarter percentage point, clearly revealed global concerns that higher rates could slow Chinese growth and thus impede global recovery. Given their high expectations of Chinese growth as a key driver of the global economy, such a knee-jerk reaction by overseas investors is fairly understandable.
However, such a cursory reading means that, those investors who see it as a sign that China's economic growth will lose steam soon, have significantly underestimated Chinese policymakers' resolution to fight inflation head-on.
If such a domestic-focused effort to thwart inflation can effectively prevent the Chinese economy from overheating, global investors should actually have more reasons to be optimistic about the world economy.
On the one hand, the straightforward effort to fight inflation indicates that Chinese policymakers are more confident about the country's growth momentum.
Though rising consumer inflation has already turned real deposit interest rates negative for months, it is believed that economic slowdown from the first quarter has largely prevented the central bank from increasing interest rates early.
