Interest Rates

They move in line, right? Economics says so. Within limits, you move your money to where it earns the most. If the Chinese interest rate is higher than the US one, you put your money there and earn, right? Though you factor in the exchange rate too, or at least the expected one for the point where you've earnt your interest and want the money back in your own currency. That's what uncovered interest parity says.

But since 1998 it doesn't look like that's what's been going on between China and the US, as the plot above shows. In fact it looks pretty much like the opposite has been happening. These are three month interbank interest rates, and they certainly seem to suggest that something else is at work. The exchange rate between the US and China has remained fixed this entire time, with the odd revaluation, suggesting something else is at work. Inflation differentials? Capital controls?

Answers on a postcard please...