Chinese Interest Rate Hike Hits Global Commodity
Prices
News of Chinese interest rate hikes hit international
commodity markets, with Brent crude for December delivery
prices in London falling back to US$48.22. China is now
the world's second largest importer of crude oil after
the US.
The change in China's interest rate policy hit international
markets much harder than the Chinese economy belies, since
the China's economy commands only 3% of world GDP. However,
the news took front page news in most world papers, underscoring
the powerful growth momentum of the Chinese economy.
China is now the world's largest importer of major commodities.
In previous years, most commodity purchases were used
for manufacture of exported products, but more and more
of the output is for Chinese domestic use and consumption.
This is particularly true for oil, steel and cement, which
are used in automobiles and housing construction.
The hike in interest rates is a welcome policy change,
as it shows the People's Bank of China will rely more
on market tools to cool the economy, instead of the original
administrative tools used in a Marxist command economy.
For practical purposes, China has now moved to a market
economy, with some isolated, but major, remnants of a
command economy.
The administrative
tools hurt new Chinese privately-owned businesses
especially hard, as they did not have cozy relationships
with the formerly state-owned banks. As a result, they
had to use underground lending facilities which charged
much higher interest rates to fund growth. This change
in policy will mean that the newly re-organized joint-share
(formerly state-owned) banks will have to court the privately-owned
businesses for business, and establish relationships with
them.
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