Explain why China raised interest rates six times in 2007 and how those moves might achieve its goals.
It is clear that China’s economy has achieved remarkable development since 2006 though the global economy was not optimistic, whereas, the high rate of development brought some unexpected effects as well. As a consequence, China government implemented a series of policies to alleviate the adverse effects, including raising interest rates. This essay will firstly examine economic situation of China in 2007, and then discuss interest rate as a policy tool and its application. In addition, it will also explain whether raising interest rates were justified by the economic conditions then. Finally, it will analyze how interest rates can affect the economy and whether raising interest rates might work in the context of China’s economy in 2007. To simplify the problem, this essay will mainly focus on raising interest rates and omit or take little account for other monetary policies.

In general, China’s economy kept increasing rapidly. GDP increased by 11.4% in 2007 (World Bank Office Beijing, January, 2008), and it was far higher than the world average rate. Among it, 40% of GDP relied on export market (King, 2007). However, there were some points to be noticed. Primarily, China’s economy in 2006 had profound effects on that in 2007. Although investments were cooled by the contractionary policy in the 4th quarter of 2006, the trade surplus compensated the adverse effects, and the foreign exchange reserves increased as well (World Bank Office Beijing, February, 2007). The People’s Bank of China (PBC) was concerned about the influence that was brought by the trade surplus when allowing for the liquidity. According to World Bank Office Beijing (May, 2007), China’s trade surplus still increased rapidly in the first quarter in 2007 and it had been the most serious