A huge announcement by China has sent shock waves through the world’s financial markets. The People’s Bank of China has announced it is going to increase the interest rates. The People’s Bank of China raised its one-year deposit rate to 2.5% from 2.25%, while the lending rate rose to 5.56% from 5.31%

According to the New York Times:

“Gold, base-metals and oil prices all tumbled, and the safe-haven U.S. dollar rose, as the first Chinese rate hike in nearly three years caught investors off guard and raised concern that the world’s fastest growing economy was starting to cool….

When the financial crisis hit, China slashed interest rates and encouraged state-owned banks to increase lending. Now policy makers are scaling back these policies to slow inflation and prevent possible credit bubbles.”

In my opinion the reason China has increased its interest rate so suddenly is to combat what the US Federal Reserve is doing to stimulate its economy. The “recovery” tactics of the US economy will probably have a nasty effect on the Chinese economy.

The Federal Reserve has declared its intention to print more money and hand it to the banks asking them to loan it out to get investment going. Of course this is not going to work because value creation is needed domestically. Investors are going to take the money and send it to China to invest in manufacturing. Well, China has already acknowledged that its economy is recovering quickly, because they have domestic manufacturing (value creation) and are now starting to buy their own creations.

This increase in printing and loaning will take most of this new money and dump it into Chinese manufacturing because it’s more profitable for American capitalists to do it there. Well China doesn’t want it, they have to slow their growth as it is. They know this new money will add to their inflation and cause their growth to happen too fast and it will become unstable. Already China is dealing with soaring housing prices and an excessively buoyant economy that is creating exports, resulting in the collection of huge amounts of foreign exchange reserves.

China is increasing its interest rates in order to slow an economy that they feel is going to fast. This very likely new injection of foreign cash will no doubt force the Chinese economy to grow faster and become unstable, possibly causing another recession for them. This increase in interest rates is a measure to protect themselves from American capitalism and its intense desire to avoid domestic manufacturing.

This sudden news about the increase in interest rates shocked a good deal of foreign trading markets. Toronto’s TSX which is heavy on energy and materials went down 1.4 percent and 2.8 percent, respectively. US technology took a good hit with IBM and Apple going down 3 percent.

China is setting a good example of how to recover your economy: have domestic manufacturing for value creation so fictional value (loans, mortgages etc.) can be realized by the real values created in commodity production. What in the hell is so hard to understand about this? These investors, these capitalists are so incensed on getting short term profits that they are basically killing the long term survivability of capitalism. This is why the US economy might not recover. This is what profit motive does, never mind the theoretical notion of creating variety in consumer goods. This is the other 99% of the profit motive; this is near proof that capitalism will kill itself.

Quote Source:
http://www.nytimes.com/2010/10/20/business/global/20yuan.html?src=busln