China Raises Interest Rates, Can It Prevent Asset-Bubble?

The Chinese yuan slumped today against the US dollar, before rebounding later, after China’s policy makers raised the interest rates for the first time since 2007 to prevent the asset-bubble. The Chinese currency gained versus the euro.

China’s central bank increased the benchmark one-year lending rate from 5.31 percent to 5.56 percent and the deposit rate from 2.25 percent to 2.5 percent. Such measures were taken to restrain lending and prevent the asset-bubble. The economists theorize that this action may have totally different effect, attracting speculative capital to the country.

Last week Japan’s leaders said that China and South Korea should “take responsible actions” and their currencies would be “closely watched”. These remarks were met with protests and complaints from China’s and South Korea’s officials. Yoshihiko Noda, Minister of Finance, explained that there was misunderstanding. He explained that Japan’s government “meant that currencies will likely be the main” and China’s and South Korea’s currencies would likely be discussed.

USD/CNY traded at 6.6454 as of 23:24 GMT today after opening at 6.6452 and rising as high as 6.6507. EUR/CNY fell from 9.2594 to 9.1252 after jumping to the intraday high of 9.2898.

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