China raised interest rates for the third time since last October in response to accelerating consumer and asset inflation. 

Before that, the central bank had also been raising the reserve requirement for its banks numerous times, starting from January 2010.

 

The inflation rate and the interest rate hikes in China represent stages of a normal economic cycle, although it's happening with an international twist.

 

After an economic downturn, central banks loosen monetary policy to combat the recession. As that happens, the economy eventually recovers and inflation picks up. Subsequently, central banks raise interest rates to cool inflation and remove the support of loose monetary policy from the economy.

 

Years ago, this process mostly happened within a country. Now, monetary policy and the economy's reaction it also transfer across borders.

 

The following happened from 2008 to 2010: the US pursued loose monetary policy, some of the effects of it transferred to China, and China is now counteracting inflation by raising interest rates. 

 

As monetary policy is tightened in China, inflation and economic growth will both cool.

 

Meanwhile, US policy-makers are stuck with a profound challenge: even as the government stimulates the economy, growth and inflation remain low because too much of the stimulus is leaking out of the country. 

 

The US economy is still plodding along and moving forward, but it's not enjoying the economic boom and inflation that usually comes after massive amounts of government stimulus.

 

Email Hao Li at hao.li@ibtimes.com