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The Chinese government must move quickly and dramatically to increase interest rates to reduce the risk of an inflation crisis.
WASHINGTON, Sept 13—The Chinese government must move quickly and dramatically to increase interest rates to reduce the risk of an inflation crisis, says a new policy brief from the Carnegie Endowment. Albert Keidel, an expert on China’s economy, urges the Chinese government to avoid the danger of harsh corrective steps which in the past caused severe declines in GDP growth, fueled deadly urban civil unrest throughout the country, and brought long-lasting damage to China’s international reputation.
In China’s Looming Crisis—Inflation Returns, Keidel argues that political disputes between competing interests groups could hold up adjustments to China’s government-administered interest rates. A delayed response could be dangerous, however, as both public and corporate bank deposits are already losing purchasing power. Value-losing deposit rates in the late 1980s and mid 1990s sparked heavy bank withdrawals and accelerated consumer spending—pushing inflationary pressures to the crisis point.
Key Recommendations:
"The next fifteen months will be especially crucial for China. Foreign criticism has already been severe, thanks to imbroglios over food and toy safety, dollar-holding scares, and Olympics-related activism,” writes Keidel. “U.S. political players are all sharpening their anti-China claws for the 2008 elections. Brutal suppression of inflation-related domestic dissent would harden already negative U.S. attitudes governing commerce, sanctions, strategic contingencies, and military spending.”
###
Notes:
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