Possibility of Increasing Interest Rates in China

In the wake of Beijing’s surprise announcement, our financial market seemed unstable while stock prices plummeted for two days and the exchange rate of the won versus the dollar rose.

Share prices of advance countries including the U.S., Britain, Japan, and Germany went down as China was likely to increase its interest rates as well following its measure to stop lending.

There are some worries that if China fails to manage its economy, South Korea’s economic growth rate will not achieve its goal of five percent as expected.

The South Korean government convened its emergency macroeconomic checking meeting on Friday to examine the potential fallout from “China’s austerity plan” on our economy and respond to that. The Ministry of Finance and Economy presided over this meeting.

The government decided to stick to its existing growth strategy by boosting investment while eyeing closely China’s austerity plan capable of “a potential danger to our economic growth.”

This day, on the Seoul Stock Exchange, the composite stock exchange index ended at 862.84, down by 12.57 points (1.43 percent) compared to the previous day. In all, the composite stock exchange index fell by 73 points for five days since Monday. The KOSDAQ index went down by 2.57 points (0.56 percent) as well. Foreign investors tried to sell over 700 billion won worth of stocks day after day.

Ahead of it, on Thursday(at local time), as the NASDAQ and the Dow Jones Index fell 1.55 percent, 0.68 percent respectively, stock prices in Britain and Germany also rode in the tide of decreasing movement. Stock prices in Japan and Taiwan fell 2.02 percent and 4.44 percent on Friday.

This day, on the Seoul Exchange Market, the exchange rate of the won versus the dollar ended at 1173.3, up 2.6 won compared to the previous day.

Meanwhile, Hong Kong’s daily newspaper, South China Morning Post, reported that the People’s Bank of China would increase its interest rates by 0.5 percent in May, citing Chinese sources.

“There is a possibility that the People’s Bank of China will increase its interest rates by 0.5 percent in early May during holiday season for Labor Day at the earliest,” Bloomberg News, an organization for news and financial information, reported citing one economist at Chinese Securities Research Institute.

In practice, recently, the Chinese government has been actively involved in its austerity plan by tightening inspection on the investment on fixed assets sector. Therefore, we can expect that it will come up with its tougher austerity plan soon.