Thursday, April 22, 2004

Ah, my friend Matt Rudolph and I had a pretty interest exchange on the whole interest rate and exchange rate issue:

Matt: Li Ruogu has dangled it out there...interest rate hike. This will make there plans for guoyougu jianchi that much harder or the assets that much cheaper(relatively less domestic demand for stocks at current prices).

I believe they will raise, and am willing to bet on it. I'll even give you two-to-one. As for yuan peg....I'm still sticking with my belief that the CentComm are ornery fucks and will do whatever they can to wait until after the US election to loosen the serpentine.

Me: You are right that they should do it some time soon, but I really wonder why they haven’t done so already. It seems reasonable especially since many SOEs are now making money hand over fist, so they can certainly afford higher rates. One reason might be that an interest rate hike would attract even more hot money from abroad. In contrast, hiking up reserve requirement would not have the same effect. As for what Li Ruogu said, I wouldn’t take it at face value. The PBOC is always on these fishing expeditions to see what the public reaction is. The State Council can still veto a hike. Your theory about the “ornery fucks” might be right, and we will see what they do after the election.

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