Global financial markets recently become alarmed about the soaring inflation rate of China, which is now well above the target of the government. Many investors and analysts think that the Chinese inflation is threatening the stability of the global economy. China’s inflation is now somewhere in the vicinity of 4.4%, soaring to a 25-month high. This is a 0.8% jump from last month’s inflation rate and way above the 3% target annual rate.

As pointed out by several indicators, it seems that the probability of China’s central bank raising the base interest rates is now becoming more certain. Both the forex market and the equity-bond markets are reacting. Bondholders are now selling their five-year Chinese government bonds at low prices that the bond yields are rising sharply. This is also an indicator that investors are expecting a hike in the interest rate before the present year ends.

Meanwhile, Australia’s effort to address its ballooning inflation has led to the inevitable option of raising its banks’ base interest rate from 4.5% to 4.75%. There are also similar market and economic pressures in other Western countries that may force them to raise their interest rates. Ballooning inflation is the main factor that prompts policy makers to resort to interest rate hikes. In so doing, it is expected that borrowing will be less attractive thereby leading to low financial liquidity or cash supply.

The latest economic figures from China include the foreign exchange value of the yuan that recently reached a 17-year-high against the dollar mainly because of the second bout of US quantitative easing that exerted downward pressures on the forex value of the dollar. The Cginese currency has rallied against the US currency by 25% since its 2005 landmark revaluation. Although the People's Bank of China has recently allowed the yuan to appreciate in order to pacify the aggressiveness of the US, many critics are still not contented and say that the yuan should at least rise by 40% against the dollar.

On the other hand, the Chinese government and some European governments are questioning the decision of the US Federal Reserve to again engage in a quantitative easing programme that will further devalue the dollar and possibly contribute in the further worsening of the inflation in China. The governor of the Bank of England, Mervyn King is among those who are debating against the escalating currency tensions that could possibly lead to protectionisms and global economic imbalance. He particularly referred to China and Germany because of their large trade surpluses.