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Rate Hike to Weigh Lightly on China's Stocks, Bonds

Sunday, 26 December 2010 12:46 PM

China’s second interest-rate increase since mid-October may have limited impact on stocks and bonds because the central bank’s stricter controls on lending have already roiled markets.

“I don’t see a big slump in the market, because the recent decline has more or less priced in the rate increase,” said Zhao Zifeng, who helps oversee about $10 billion at China International Fund Management Co. “Large-capitalization stocks are already close to historical lows in terms of valuations.”

The central bank said Saturday it would raise its benchmark one-year lending rate by 25 basis points to 5.81 percent, and the one-year deposit rate the same amount to 2.75 percent. The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and reached a three-year high of 5.67 percent Thursday.

The cash crunch contributed to a 13 percent decline in the Shanghai Composite Index of stocks this year, the biggest drop among the world’s 15 largest equity markets, including a 2 percent loss last week. The yield on the benchmark 10-year bond climbed 50 basis points, or 0.5 percentage point, this quarter to 3.83 percent, according to the China Interbank Bond Market.

Chinese Premier Wen Jiabao is seeking to slow gains in property values and consumer prices that are making it harder for families to buy homes and pay for food. China reported 5.1 percent inflation for November, the highest in 28 months. There were rumors about a 50 basis point increase so “some may even take this as a positive,” Ting Lu, an economist at Bank of America Corp.’s Merrill Lynch unit, wrote in a note.

Quantitive Measures

The rate increase "is more a signaling tool than anything else,’’ Yu Song and Helen Qiao, analysts at Goldman Sachs Group Inc., wrote in a report. “We still expect the government to take a combination of measures to control inflation, including further rate hikes and possibly slightly faster currency appreciation, and believe the heavy lifting of controlling inflation will still fall on quantitative measures.”

The People’s Bank of China raised rates for the first time since 2007 in October, and ordered lenders to set aside more money as reserves for the third time in five weeks Dec. 10. Chinese new bank loans have fallen for two straight months, to 564 billion yuan ($85 billion) at the end of November from 596 billion yuan in September, government figures show.

“The impact of the rate increase will be very limited on stocks,” said Zhang Ling, a fund manager at Shanghai River Fund Management Co. “The recent decline has already reflected the tightening of monetary policies and the market will keep its fluctuating pattern until early next year.”

Stronger Yuan

The yuan has risen 0.3 percent since Dec. 6, when 30 U.S. senators sent a letter to Chinese Vice Premier Wang Qishan calling for the yuan to “appreciate meaningfully” before President Hu Jintao’s visit to Washington next month. A stronger yuan would help curb a trade surplus that exceeded $20 billion for the fifth time in sixth months, indicating a recovery in international trade from the global financial crisis.

The Chinese currency strengthened 0.24 percent to close at 6.6270 per dollar on Dec. 24, the biggest advance since Nov. 9, according to the China Foreign Exchange Trade System.

The one-year interest-rate swap, the fixed cost to receive floating payments, has dropped 25 basis points from a two-year high touched on Nov. 29, reflecting easing speculation on how much the central bank would raise rates.

Bank of America-Merrill Lynch’s Lu said he expects two rate increases in 2011, with inflation falling below 5 percent in December this year. Morgan Stanley’s Hong Kong-based economist, Wang Qing, forecast three more interest-rate adjustments of 25 basis points each in the first half of next year.

“The interest-rate hike came earlier than the market had expected, which will push up bond yields on Monday,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “But there won’t be a panic selling like what happened after the last rate hike because the tightening measures show the PBOC’s determination to contain inflation.”

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China s second interest-rate increase since mid-October may have limited impact on stocks and bonds because the central bank s stricter controls on lending have already roiled markets. I don t see a big slump in the market, because the recent decline has more or less priced...
Sunday, 26 December 2010 12:46 PM
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