China responded to increased inflation by hiking interest rates for the second time this year.
Most economists believe China's economy will still grow healthily, and we agree.
China is an important Emerging Market. But others are clocking fast growth too—and will likely contribute even more in coming years.
China responded to rising domestic inflation (which hit a 28-month high of 5.1% y/y in November) by hiking interest rates for the second time this year on Monday—raising one-year benchmark lending and deposit rates by 0.25% to 5.81% and 2.75%, respectively. The rate hikes come after three reserve requirement increases this year and a number of more finely targeted lending restrictions. China is reining in stimulus, no bones about it.
However, we don't think they'll overtighten and choke growth—not in the near term. And for what it's worth, even with the most recent (and relatively small) rate hike, most economists agree China's still set for healthy expansion. But that doesn't mean China must remain in the lead—or the global expansion must be imperiled if they don't. It's not uncommon for countries to swap pole position in recoveries and expansions. And while tighter policy may slow China's relative growth, other Emerging Markets (EM) may be poised to take up any slack.
India, for example, is experiencing an infrastructure boom much like China did a decade ago. Improving infrastructure in China has boosted productivity and continues supporting economic growth. Though the two were comparable 20 years ago, India fell behind more recently. The reason? Most of China's infrastructure investment was directed by the government—with relatively few democratic "hindrances"—while India's lumbering (and often corrupt) bureaucracy lagged.
But that's been changing since a 2005 Indian law limited required government participation in infrastructure projects. Under the law, private firms can put up most of the cash, direct the building of infrastructure, and retain operating rights for a set period of time. The government need only secure permits and provide a portion of funding. The plan seems to be working thus far. Since 2005, Indian infrastructure growth has taken off—and unlike the Chinese model, it's been mostly spearheaded by an eager and more efficient private sector.
Now, the Indian government hopes to encourage $1 trillion in new public/private investment to build roads, railways, ports, etc. in the coming years. And perhaps not so surprisingly, India's economy is expected to continue rapidly expanding (9.7% in 2010 and 8.4% in 2011). Like China, India accounts for a huge slice of world population—much of it as yet undeveloped. Infrastructure-induced productivity gains can potentially support India's economic growth for years. That's not to say India will expand just so; there may be bumps along the way. But the country serves as an example of the huge potential throughout Emerging Markets—and that China, while important, isn't everything.