China’s interest rates “have to go up more” – World Bank

China housing Dec10.pngWhat happens if you suddenly double bank lending in a country, and make it equal to 1/3rd of total GDP? And, as part of the experiment, add a further 13% of GDP via a $580bn stimulus programme?

We don’t know yet, because it has never been done before. But we are about to find out. Because this is what China has done over the past two years, since the Crisis hit, in order to keep its population employed.

The first part of the answer is easy to guess. A massive boom takes place in consumer spending, house prices leap, and demand generally goes through the roof. After all, we’ve been here before, with the US Federal Reserve’s low interest policy following the collapse of the dot-com bubble.

But China’s boom has been an altogether different level of magnitude. Even Alan Greenspan, when Fed Chairman, would never have dared to follow China’s recent path. So all we do know, so far, is that China has become the main source of global demand growth for the chemical industry. Equally, as the chart shows, housing prices have soared.

According to an official survey by China’s top Think Tank, the “actual value of commercial housing in Fuzhou is only 3,998 yuan ($600) per square metre, while the market price is 13,457 yuan“. Its analysis suggests this is a 70.3% bubble, with other major cities such as Beijing not far behind.

Plus, today’s figures show inflation is now rising very fast. It was 5.1% in November, up from 4.4% in October. Food prices were up an astonishing 11.7%. As the World Bank note in a new report:

After the massive monetary expansion since the end of 2008 there is a lot of liquidity sloshing around, potentially putting upward pressure on prices, especially asset prices. In this setting, there are reports that speculative activity has driven up prices of several food products.”

So will China now follow the Bank’s advice and reduce lending, whilst also increasing interest rates? If they do, what will happen to growth rates? If they don’t, how far might the housing bubble go, before it finally bursts?

As the blog noted in its Budget Outlook, the world has become a much more uncertain place over the past 2 years since the Crisis began.

Throwing money at the problem, as China is probably about to discover, is the easy part. The more difficult part, of dealing with the consequences of such rapid expansion, now lies ahead.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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