China raises rates again - what does it mean?

China raised interest rates again over the week-end by 25 bps in order to slow monetary growth and stop the inflation increases which have picked-up this year. While this is a continuation of the policy of trying to slow credit growth, it may not have much of an effect given rising prices. The real rate of interest is not rising. Additionally, since most lending is done through banks that are not truly independent, the expansion of credit is not really driven by the price-side of the equation as much as the quantity-side. If banks want to reduce credit, then they have to stop lending and not just have prices adjusted. It is the lending quota set at the end of the year that will matter most to whether credit will slowdown.

The rise in inflation will be a key issue for China. It can be curtailed through allowing the exchange rate to rise.The amount of dollars that have to be purchased will be reduced which will allow for a slowdown of credit.