Special Report: Interest Rate Hikes and Inflation in H1 2011

High inflation has prompted China to adopt a new motto for 2011 monetary policy: “wenjian,” meaning “stable,” “steady” or “prudent,” adjectives that run contrary to the high-growth policies of the last two years. In practice, wenjian has meant a series of gradual tweaks to interest rates, RRR and lending quotas, as the government seeks to strike a balance between combating rising inflation and maintaining strong economic growth. The approach contrasts with that of 2007, when surging economic growth and a possible real estate bubble drove the government to jack up rates in a series of sharp increases: GDP growth fell to 10.8% in Q2 2008, from 15.0% in Q2 2007, while one-year deposit rates went from 2.52% in February 2007 to 4.14% by December 2007. The Chinese government is unlikely to repeat that move – but will it be able to control inflation and sustain GDP growth? In this report, we examine the possible impact of inflation and interest rates on China’s economic growth in H1, followed by a discussion of how these trends will affect the sectors we cover.