To Slow Growth, China Raises an Interest Rate

[CardSharp]

China’s surprising decision Tuesday to raise its benchmark interest rates by 25 basis points, the first increase in three years, suggests the country’s leadership is concerned about the rampant pace of lending growth, analysts with Capital Economics said.

“The immediate, direct impact on the economy will be minimal, but one longer-term effect will be to raise the income of savers, which is a small, positive step in China’s efforts to rebalance,” Mark Williams, senior China economist, said in a note to clients Tuesday.

However, markets reacted negatively to the decision, a “knee-jerk reaction” from some who did not see a hike coming, Nick Chamie with RBC Emerging Markets Research said.

“We have long forecast a rate hike before year-end in China’s key interest rates as part of the government’s efforts to unwind some of the extraordinary measures put in place during the financial crisis,” he said in a note. “The initial knee-jerk reaction … has been to sell risk: stronger U.S. dollar, weaker commodity prices, lower equities. The rationale behind this is that very easy Chinese monetary conditions have been one of the primary drivers for global asset demand (including commodities) and that this start to the rate hiking cycle will tighten monetary conditions thus reducing demand from China.”

Mr. Chamie forecasts another 50 basis points in hikes to come in 2011, with the Chinese yuan continuing to strengthen against the U.S. dollar, possibly to a low of US$6.20 by the end of 2011.

The timing of the announcement — the Tuesday after key meetings of the Communist Party leadership concluded over the weekend — was not a coincidence for exactly this reason, Mr. Williams said.

“Most probably, the decision to raise rates was made a week ago, when reserve requirement increases were imposed on a handful of banks. The People’s Bank may have held off from announcing the move until after the meeting … for fear it would trigger an inauspicious decline in equities,” he said.

Even so, the hike will have little effect on how much banks lend, and will likely not impede an economy still growing in the double-digits.

 

[CardSharp]

China’s interest rate hike a bid to pause lending growth

Read more: China’s interest rate hike a bid to pause lending growth | Trading Desk | Financial Post

HONG KONG — China’s central bank raised a key interest rate slightly Thursday for the first time in nearly five months, in what economists interpreted as the beginning of a broader move to tighten monetary policy and forestall inflation.

After breaking stride a year ago during the global economic slowdown, the Chinese economy resumed galloping growth over the summer. Government investments, real estate construction and consumer spending are all rising briskly, thanks to a surge in lending by government-controlled banks.

Even exports have begun to recover despite continued economic weakness in the European Union and the United States, China’s two biggest overseas markets.

Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.

The People’s Bank of China announced Thursday that the yield from its weekly sale of three-month central bank bills had inched up to 1.3684 percent. The yield had been stuck at 1.328 percent since Aug. 13.

An increase of less than 0.05 of a percentage point might sound small, but economists said it was a harbinger of more interest rate increases to come.

They cited expectations that consumer and producer prices would rise in the months ahead, particularly compared with low price levels a year ago, when demand temporarily slumped in China as well as the rest of the world.

“It is a turning point,” said Ben Simpfendorfer, an economist in the Hong Kong offices of Royal Bank of Scotland. “There is a convergence of events that will lead to higher rates.”

The increase in the interest rate turned mainland China’s stock markets into Asia’s worst performers Thursday. The CSI 300 index of shares on the Shanghai and Shenzhen stock markets slumped 1.98 percent.

Air freight capacity out of mainland China and Hong Kong was almost fully booked in December, according to shippers, making it likely that China would post strong exports when it released a flood of monthly and annual economic data next week. But in interviews this week, senior corporate executives voiced a range of opinions about whether this strength would continue into the new year, or whether the surge in December represented a flurry of restocking by retailers who went into the Christmas season with meager inventories.

Victor Fung, the nonexecutive chairman of Li & Fung, a Hong Kong-based trading and supply chain management company that is one of the world’s largest, said that overseas demand had not been strong enough to sustain the strength in China's shipments seen last month. But he added that his own staff was somewhat more optimistic than he is, as are some investment bank economists.

Thursday's slight increase in interest rates could prove even more significant if it marks the start of an effort by Chinese regulators to limit bank lending. Chinese banks have not only lent heavily at home, but stepped up lending in other countries as well, taking market share from Western banks hobbled by the global financial crisis.

Top officials at the People's Bank of China concluded an annual two-day policy review on Wednesday with a lengthy statement that had particularly strong cautions against bank lending to sectors of the economy with overcapacity or excessive energy use. Chinese bank regulators also warned banks in late November to show more caution in lending and raise more capital to underpin the surge in lending they have already done; the publicly traded Bank of China is widely expected to take the lead in raising money this year.

Thursday's interest rate increase is not the first since the bottom of the economic downturn. After cutting interest rates on the same 3-month central bank bills by 2.4 percentage points in the last quarter of 2008 as the world's financial system trembled, the People's Bank nudged up interest rates by 0.363 from late June to early August last year in a series of increasingly large weekly increases.

 

[Chinese-Dragon]

Yes, "sustainable growth" is much better than just fast growth.

During the credit crunch, the CCP told the Banks to lend more money, as part of the stimulus package to prevent recession. Fears of recession in China are now gone, so it's good that they are reigning in the Banks to prevent overheating.

This is not the first time they have reigned in the Banks. Last time they did it, the stock markets took a slight tumble, so watch out for your investments.

This is good for China overall though, since no one wants the economy to overheat, and this will stop potential bubbles forming. Good work.

 

[CardSharp]

Yes, "sustainable growth" is much better than just fast growth.

During the credit crunch, the CCP told the Banks to lend more money, as part of the stimulus package to prevent recession.

Fears of recession in China are now gone, so it's good that they are reigning in the Banks to prevent overheating.

This is not the first time they have reigned in the Banks. Last time they did it, the stock markets took a slight tumble, so watch out for your investments.

This is good for China overall though, since no one wants the economy to overheat, and this will stop potential bubbles forming. Good work.

I'm afraid stocks have already tumbled all over the world including the eurozone on this news, oil prices have also dropped. It seems that China's economic reach is becoming global. (it probably was already some years ago but this is a clear demonstration of the fact)

 

[SXNJ]

Hi, guys, do you think it's a good gesture for the Chinese stock market?

 

[Chinese-Dragon]

Hi, guys, do you think it's a good gesture for the Chinese stock market?

The last time China reigned in the Banks, global markets fell.

It's not so severe this time... so expect maybe a small drop in the markets tomorrow, and maybe a bit more in the day after.

Long-term prospects (more than a month) seem good though. I don't think it's necessary to sell any shares that you have, or anything like that.

 

[SXNJ]

The last time China reigned in the Banks, global markets fell.

It's not so severe this time... so expect maybe a small drop in the markets tomorrow, and maybe a bit more in the day after.

Long-term prospects (more than a month) seem good though. I don't think it's necessary to sell any shares that you have, or anything like that.

Agree with you

 

[ThatDamnGood]

Sign of economic strength. You can tell who the boys are (zero interests) and who the men (and not just China).

 

[anon45]

Sign of economic strength. You can tell who the boys are (zero interests) and who the men (and not just China).

troll