China raises interest rates –reviewing its effect on crude oil prices

As speculations expected, China decided over the weekend to raise its interest rates, in order to fight its ongoing rapidly growing inflation.

China reported that for the month of November, the inflation rate of 5.1%, which is the highest rate in the past two and half years. Nevertheless, China is still showing good economic production as exports reached 153.3 billion USD, in November, along with a trade surplus exceeding 20 billion USD.

In an attempt to counter the rising inflation pressures, China’s central bank decided to raise its interest rate so that the one-year lending rate will rise by 25 basis points to 5.81%, while the one-year deposit rate will also increase by 25 basis points to reach 2.75%.

According to BloombergChina is targeting growth in industrial output of 11 percent next year, slowing from an expected 15 percent pace in 2010“.

Asia’s demand for energy was responsible for 70% of the world energy growth in the past couple of decades, in which China was responsible for 40% of it. Furthermore, China’s energy demand nearly tripled since 1990.

China’s economic boom and rapid rise in recent years was heavily depended on Coal, which provides roughly 70% of China’s energy. China is also heavily depends on Crude oil, and since it has very little of it, China relies on importing Crude oil.

According to Forbes China consumes over twice its production of Crude oil; And with 8,200 b/day, China is the second largest economy in petroleum consumption, after the U.S.

As China is trying to slowdown its economic activity, this could mean that these steps taken to fight inflation will slow China’s economic growth and consequently its demand for importing crude oil. Thus, if China’s government will succeed in containing the inflation pressures, it could have an adverse affect on one of the biggest importers of crude oil, which will reduce the rising pressures for crude oil prices as 2011 will progress.

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