Did China Wait Too Long To Raise Rates?

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MarketWatch First Take

Nov. 11, 2010, 11:30 a.m. EST

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China could learn a thing from Sarah Palin

WASHINGTON (MarketWatch) "” If Sarah Palin could tweet in Mandarin, she'd say, "Told ya so."

The crux of the former Alaskan governor's central bank critique has proven itself out in the Middle Kingdom.

The People's Bank of China left interest rates at low levels (for it "” 5.31%) throughout 2009, even when major indicators started turning back upward in the spring and summer.

Now, consumer prices are climbing to startling levels, some 4.4% in October, and 10.1% on food. See related China inflation story.

The central bank, no doubt facing huge pressures from the central government, simply kept interest rates too low for too long. Now Chinese authorities are scrambling to catch up, increasing the reserve ratio on its major lenders' deposits by a half percentage point on Thursday, having already made an interest-rate increase in October.

The central bank looks to have committed a classic mistake of waiting for price pressures to overheat before acting, rather than moving before they do so.

Of course, Palin's critique was directed toward Ben Bernanke (and our colleagues at The Wall Street Journal), and not Zhou Xiaochuan.

The U.S. and South Korea pushed past their original deadline to try and clinch a free-trade deal as President Obama attended the G-20 meeting in Seoul.

It's not obvious the U.S. Federal Reserve is confronting a similar dilemma.

Beyond the major differences in growth rate "” 3% or so would be strong in the U.S. and incredibly weak in China "” the fundamentals of urbanization dictate that Chinese growth should be strong for some time. Deleveraging by both institutions and consumers, as well as underwater house prices, should hamper U.S. output for some time.

In the U.S., as the article that Palin referenced but didn't correctly summarize, food input prices have indeed soared, but retail food prices have not, in fact growing at the slowest pace since at least 1968.

Retail gasoline prices are nearly 80% above 2009 lows but still 30% below 2008 highs. And the inflation gauges that strip out food and energy are barely budging.

The one thing the Chinese experience does show is the risk of going too long with accommodative policy. There's every reason to fear the Fed will be too slow in lifting rates, not to mention ending quantitative easing, but that doesn't mean those fears are close to realization.

"” Steve Goldstein

Central bank may have been too slow to raise interest rates.

11:30 a.m. Today11:30 a.m. Nov. 11, 2010

The problem is Sarah Palin has no idea what she is talking about... she doesn't know WHY bernanke is wrong, she just says he's wrong because that's what she's supposed to do to pander to her base."

- rolexx | 11:12 a.m. Today11:12 a.m. Nov. 11, 2010

"Follow the European market @mktweurope" 12:46 p.m. EST, Nov. 11, 2010 from MarketWatch

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"Cisco, plunging 16%, is Dow's big loser early Thursday; blue chips off 90 points http://on.mktw.net/akrB3n" 9:42 a.m. EST, Nov. 11, 2010 from MarketWatch

"Cisco selloff restrains QQQ's drive toward 2007 high http://on.mktw.net/diMip1" 8:36 a.m. EST, Nov. 11, 2010 from MarketWatch

"Portugal, Ireland, Spain CDS spreads hit records http://on.mktw.net/almhmU" 5:26 a.m. EST, Nov. 11, 2010 from MarketWatch

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