October 20th, 2010
05:11 AM GMT
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(CNN) – There’s an old joke about economics: “If I have a foot in a bucket of hot water and a foot in a bucket of cold water, on average I’m warm!” Well that same economic principal could be applied to China right now.

The government is proud of its continuing rapid growth; it needs a strong economy to continue modernizing, providing employment and evening out social inequality. But it has to be the right kind of growth, growth that distributes the wealth across the society.

The problem right now is that money has been too cheap and too readily available. That’s led to speculation and investment in the property market that has seen rapidly escalating prices; in other words a good old unsustainable bubble.

This may be good for the cashed-up speculators but it also leads to a spike in inflation. That hurts the vast majority of people who have to pay more for essential goods: clothes, food, power and water.

The government has now decided to hike interest rates with the hope of pricking the bubble and reigning in prices.

By boosting both the lending and savings rates it hopes to encourage people to put their money in the bank for a better return rather than chasing the quick riches of real estate. It needs that bucket to cool.

The hot water bucket is GDP. The government doesn’t want growth to cool too rapidly. It wants to calibrate the economy to get the money flowing into the “real economy” where more people get a share.

There’s a leadership change looming in 2012 and the incoming president hardly wants to be the one left standing when the music stops!

Then there’s the ongoing pressure for China to let its currency, the yuan, increase in value. This, say China’s critics, will level the playing field, making China’s exports more expensive.

It would also help China by making imports cheaper, thus reducing that pesky high inflation. Ordinarily, a rise in interest rates would put more upward pressure on the value of the yuan, but China closely regulates its currency rate and doesn’t want any rapid moves.

There are still so many unanswered questions: Will there be more rate rises? Will the currency value increase? If so: then by how much? Will speculators be lured even further by a greater interest rate return on their investment?

Hot and cold; it’s a delicate balancing act. Right now China needs it feet in two warm buckets.

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Filed under: BusinessChinaFinancial markets

soundoff (12 Responses)
  1. michael

    So how exactly does one country lend another money.
    How is it possible for the USA to Borrow Chinese money and spend it in america ?. Okay so does america borrow a Billion dollars in chinese currency , then do the conversion and print it out in America ? Thats would mean America has to ask China for permission too print money , or does China just print loads of its own currency and then lend it to other countries at interest. What and who's army stops any country from printing up lots of money and converting it to a foreign currency and buying up europe ? Does anyone know whos running this shamm.

    Do countries borrow money from the IMF , who regulates how much money the IMF can print , where does the IMF get its money from. If the world economey is worth 1000 trillion, is there 1000 trilion dollars in gold hiding somewhere.

    Why doesnt africa just print loads of mone yand convert it intoE uro's , who stops them ? Has anyone ever heard of a country being invaded because its been printing money ?

    October 20, 2010 at 10:40 am |
  2. michael

    If Afghanistan wants to borrow money it prints a bond paper and gives it to say Brazil and brazil gives them something in return.
    Who authorises the BOnd to be printed , why print a Bond whn you could just print money.

    October 20, 2010 at 10:42 am |
  3. syu

    seems reasonable~~
    love this old joke on the ecomony~~
    we should consider how to cool the rising housing price and warm almost normal people's life and dont make a cold society~~

    October 20, 2010 at 2:00 pm |
  4. levend

    Countries don't print more money because it devalues its currency and creates inflation. The US has started printing more money to reduce its debt, because of the recession inflation isn't an issue. The countries that are screwed are the ones that gave the US the loan, their loan is now worth less.

    October 21, 2010 at 1:18 am |
  5. Joe Normal

    Michael, you need an education. That's something a message board can't help you with.

    October 21, 2010 at 5:26 am |
  6. S G Thampi

    Very well written. Informative, simple and stripped off all jargons.

    October 21, 2010 at 5:37 am |
  7. BSTeh, Kuala Lumpur, Malaysia

    Me thinks the Chinese leaders have prioritised their national agendas taking into account their domestic needs and desires, strengths and weaknesses. National economic growth balanced with social economic equality, as much as realistically possible without foregoing pragmatic probabilities.

    Ideology is a many letter word but a centralised and controlled administration has the distinct advantage of not having to play to the tunes of multiple choruses and compromise a workable and effective national program into a partisan watered down half measure.

    As a Johnny-come-lately, China has the added scope on the pitfalls and perils of unrestrained capitalism and the global situation is becoming more fluid, volatile, convoluted and nationalistic.

    It is hardly unusual for every nation to look out for its own interest first and China with ordinary issues made monumental in proportion due to its huge population can hardly be faulted for wanting to preserve domestic stability over growth and international image.

    That China should wish to 'rule the world' and assume the mantle of global leadership is the creative imagination of western media of a long anachronistic stereotypical suspicion of sinister oriental subterfuge.

    The ability of Chinese leadership to weather the wittering and relentless assault and pressure of western 'awe and shock' tactics will have strong bearing on its longevity and relevance to its increasingly restive and discerning comrades.

    Given this awareness, it is indeed wise of other economic powerhouses to forge ahead with their own economic progress in tandem with China's economic growth and leave the bouts of unproductive political verbosity to other unhappy nations.

    Truly, economic pragmatism and national expediency make for strange bedfellows.

    October 21, 2010 at 7:04 am |
  8. CCP haterade

    More CCPinese talking about "printing paper" as if they have any idea what they are talking about. All countries "print paper money" and don't back it by gold.

    October 21, 2010 at 8:39 am |
  9. AEIOU

    The answer is : MONEY HAVE NO REAL VALUE !!!

    October 21, 2010 at 12:27 pm |
  10. ll

    You're funny,actuual!!
    Don't pin the blame on China anymore.

    October 23, 2010 at 7:20 am |
  11. John

    @Michael, I think when US borrows money from China, those are the trade surplus US dollars, not the Chinese yuan. Those are the money banked in some banks in New York anyways. If China prints too much Chinese money, the inflation will quickly screw up the Chinese market, and the lives of millions of Chinese people too. US is actually the only country that can print large amount of money without suffering the consequences of inflation due to its world currency status.

    October 24, 2010 at 7:48 pm |
  12. Rajendra Dhakal

    when the nation gets improve his development and ultimately he need to get updates on economic improvements regularly. It's common

    Which nation get such growth of progress to improve their economic values globally?? n
    Sure No one get.
    I've simple example
    When your salary is high your expenses may also but not sure. Commonly the philosophy is difference on view of angle to see.

    October 25, 2010 at 4:13 am |

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