Europe Economy

China Takes the Foot off the Gas

Patrick Allen, CNBC Senior News Editor

The surprise news from Shanghai overnight that the Chinese central bank is raising short-term interest rates and withdrawing liquidity from the market is a clear sign that the authorities want to take the foot off the gas after the countries publicly owned banks pumped billions into the economy in 2009.

Just one day after telling the market it would keep credit growth in check this year the central bank followed up with the hike sending commodity prices sharply lower as traders bet the action would lead to lower demand from the world’s third-largest economy.

While Thursday's move was small, investors are clearly betting more tightening is on the way. Jonathan Fenby, the Director of Chinese Research at Trusted Sources said the Chinese high command is clearly worried about the impact of the 2009 stimulus package on the countries long term prospects.

There has been lots of speculation that the billions pumped into the economy is simply storing up problems. Fenby said the Chinese high command is now beginning to worry about their legacy now that the measures they took shored up demand when the countries export markets collapsed. Fenby said that unfortunately this policy, without a resultant rise in domestic demand, will mean “there will probably be a dip in the second half of the year, you will get a W-shaped pattern.”

Chinese Economy Faces H2 Dip

The long-time China watcher is also unsure that the Chinese authorities will be able to have a huge impact on the economy via monetary policy.

Of course what would be a game changer for Chinese domestic demand would be a higher Yuan. Those hoping that the Chinese may finally allow the currency to rise could again be disappointed. David Bloom, who runs the currency team at HSBC in London, warns those predicting such a move will again be wrong. He admits the fundamentals point to a higher currency but points out this has been the case for years and will continue to be so for some time to come.

- Watch the full interview with Jonathan Fenby above.