Right when most of fund managers, financial brokers and traders were exchanging gifts under icicle lights on Christmas trees, policy makers of the Middle Kingdom were cooking up some other plans.
The surprising (or not-so-surprising) Christmas gift from the Chinese was an interest rate hike of 25 basis points - the second rate hike in the last ten weeks.
And, by the way, this is not something very drastic since the country has been on a spree of monetary tightening policies, particularly in the latter half of the year. Since October, the country has raised benchmark interest rates twice and increased the banks reserve ratio requirements thrice.
Within a span of three months, such moves indicate that something is giving the policy makers sleepless nights. So whats the bothersome snag thats been inducing such policy moves? It is Chinas spiraling inflation, dear readers.
Chinas consumer prices rose 5.1% in November from a year earlier, the biggest increase since July 2008, while the price of food alone increased 11.7 percent from a year earlier in November.
But inflation is not the only quandary troubling the country; its overheated economy also faces the risks of rising property prices and speculative hot money inflows, that are heating up the economy further.
Financial Times cited an interesting email circulating amongst the Chinese regarding what an ordinary person in their society faces: "Can afford to be born because a Caesarean costs Rmb50,000; can afford to study because schools cost at least Rmb30,000; can afford to live anywhere because each square meter is at least Rmb20,000; can afford to die because cremation costs at least Rmb30,000," the e-mail reads.
The economic scenario and the consequent monetary tightening has put Chinese officials at crossroads. On one end, the country is striving to pull the strings on rising inflation and speculation in property markets.
At the other end, it wants to continue with its growth trajectory and also generate jobs for its huge population, tasks that stand at odds to the hawkish monetary stance the country has adopted.
Further, the rising interest rate scenario means more hot money is likely to flow into the country, especially in the midst of the monetary easing stance being adopted by the leading Western economies.
Yet, economists believe the interest rate hike was much needed, given Chinas aggressive growth model which had often been accused of being unsustainable. Consequently, many analysts believe the country will continue to raise interest rates by as much as three times in 2011.
The tightening moves by the country may weigh in on commodity prices and currency and stock markets as one of the biggest economies in the world attempts to cool down. The dollar was near a three-week high against the euro after the news on Chinas rate hike, while US wheat futures tumbled by 0.7 percent on Monday.
But the response in the international markets was largely muted because investors had priced-in the expected rate hike from the Big Red in their investment decisions.
Brian Jackson, strategic analyst at the Royal Bank of Canada, said, "We believe that gradual policy normalisation now should help keep Chinese growth and commodity demand on a sustainable trajectory."
The country, indeed, has the potential to deal with the potential risks it faces, as the Lex Column aptly pointed out, "(China) has a powerful autocratic government, a largely state-controlled bank system, a huge reserve of foreign currencies and the momentum of rapid growth, which quickly covers over financial mistakes."