And Now, China

| Tue Oct. 19, 2010 12:48 PM EDT

China's financial mandarins are finally getting worried enough to do something about their bubble economy:

China’s central bank unexpectedly announced Tuesday that it would raise interest rates for the first time in nearly three years, apparently in the hopes of dampening inflation and cooling off this country’s hot property market.

....Analysts said they were surprised by the decision, because a bank oficial had suggested just days ago that no rate increase was needed. Still, late Tuesday the bank announced the first rate increase here since 2007. Analysts said it was one of the strongest signals yet that Beijing is having difficulty managing the country’s growth.

....The decision to raise the rates came after a surge in bank lending in September, reports of higher property prices last month and indications that inflation may have risen sharply in September, after a big jump in August.

China's economy is more opaque than most, but I think big governments everywhere react approximately the same way to bad news: too slowly and too weakly. Thus, the fact that China is finally taking modest but highly public action to rein in their property bubble and cool down inflation suggests to me that their economy is in more serious trouble than anyone thinks. I suspect they're now in about the same position that the U.S. and the rest of the world were in during 2007: they know things are going south, but they're still hoping against hope that the problem is temporary and manageable and can be muddled through with only modest measures. By the time they finally face up to the fact that it's not, it will probably be too late.

I hope that one of two things turns out to be the case. (1) I'm wrong. (2) The rest of the world economy is in good enough a shape a year or two from now to handle a major Chinese downturn. I don't have a ton of faith in either one of these possibilities, though.

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