Tags: China | Hikes | Rates | Loans

China Hikes Rates on Loans

Thursday, 27 April 2006 12:00 AM

China's central bank is raising interest rates for the first time since October 2004. The interest rate hike - designed to curb China's rapid growth - will apply to new loans only, not deposits. The move pushed commodities lower and sent the dollar reeling.

The central bank statement said, "The increase in the lending rate is aimed at further strengthening the fruits of macro controls and keeping solid momentum for the economy to grow in a continuous, rapid, coordinated and healthy manner."

The People's Bank of China will boost the one-year benchmark rate - which applies to nearly half of all loans in China - to 5.85% from 5.58%. Plus, according to MarketWatch, the central bank is also raising longer-term loan rates:

The one-year deposit rate will remain at 2.25%. The Chinese government has been encouraging its citizens - consummate savers - to increase domestic consumption.

Sean Callow, currency strategist at Westpac Banking in Singapore, tells Bloomberg News: "They've left the deposit rate unchanged so they clearly don't want to make the yuan any more attractive than it already is. They're not short of savers and don't need to encourage any more Chinese to save money."

Raising the loan rates, in contrast, is designed to limit large investments such as constructing new buildings and roads.

Fixed-asset investment in China rose 27.7% in the first quarter - a much faster pace than the government expected.

On Tuesday, China's National Development Reform Commission hinted of the rate move, saying in a release: "We must strengthen adjustments in fixed-asset investment and tighten the throttle on land and credit."

The central bank's rate hike raised concerns amongst commodities traders -because a cooling of China's building boom could put a damper on the worldwide commodity explosion. China is the world's largest consumer of copper and steel - and the second-largest consumer of oil. So a crash in consumption would certainly hurt commodities.

Julian Jessop, chief international economist at Capital Economics Ltd., tells Bloomberg News: "There is the risk the investment boom in China turns to bust and that would have a knock-on effect on the rest of the world. Higher rates may take off some of the froth from commodities markets."

Then again, if China achieves its goal of "continuous, rapid, coordinated and healthy" growth, commodities should continue their bull run.

In fact, after falling in early-morning trading, commodities had already begun to recover by mid-morning. Gold was heading toward a new 25-year high.

As for the dollar, China has come under fire for its large trade surplus, which widened to $11.2 billion in March. Its trade partners - especially the U.S., which holds the largest trade deficit with China - are alleging that the Chinese keep their currency artificially low in order to make Chinese exports cheap and desirable. The rate hike will likely raise the value of the yuan, paring down its trade surplus.

In mid-morning trading, the dollar was getting slammed as Asian currencies moved higher. Li Jin, assistant professor of finance at Harvard Business School, told MarketWatch: "It might be a sign that the government expects the yuan to appreciate … China is trying to prepare for that scenario."

All eyes were on Federal Reserve Chairman Ben Bernanke today as he testified before Congress.

Investors were looking for a hint regarding what the Fed will do about interest rates and what Bernanke's take on the relative health of the U.S. economy might be.

Based on feedback from the analysts we're talking to at MoneyNews, there's little doubt that the Fed will raise interest rates another quarter-point when the Federal Open Market Committee (FOMC) meets May 10.

However, it is considerably less clear what steps the Fed will take at the June 28-29 Fed meetings. As we reported two weeks ago, the minutes from the last Federal Reserve meeting seemed to indicate that the Fed was close to ending its string of consecutive rate hikes.

"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy," according to the meeting notes.

Bernanke's speech today gave investors a glimmer of hope.

While he did utter the dreaded "I" word - inflation - he also hinted that the Fed may pause their rate hikes after May.

"To support continued healthy growth of the economy, vigilance in regard to inflation is essential," Bernanke said. He went on to assert that recent economic reports "have not materially changed that assessment of the risks."

But Bernanke also pointed out that rising energy prices and the housing slowdown are worth keeping an eye on. These factors could compel the Fed to stop raising interest rates.

"Rising energy prices pose risks to both economic activity and inflation," Bernanke commented. Oil prices have backed off their record highs this week but are still at $72 a barrel.

Bernanke warned that even if energy prices stabilize, they would still dampen economic growth. He noted that high energy prices could feed inflation, though there are no signs of that yet.

And he concluded that the Fed is closely watching "core" inflation numbers - which exclude food and energy prices - for signs of broadening inflation.

Bernanke's assessment of the housing market is that the "sector will most likely experience a gradual cooling rather than a sharp slowdown." But a housing market crash would cause the rest of the economy to slow, which would certainly force the Fed to pause. The agency will also keep a close eye on this.

Meanwhile, Bernanke held open the possibility of a temporary pause in the rate-raising cycle.

"At some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings," said Bernanke.

The markets cheered Bernanke's balanced statement, and stocks edged higher in mid-morning trading. The dollar, still suffering from China's rate hike, was also battered by Bernanke's mention of a pause.

Bernanke did a good job of balancing out talk of a pause with inflation concerns, and the Fed will likely keep the markets volleying back and forth in the coming months. Traders have already priced in a May hike, but subsequent moves are still up in the air.

Only time will tell. But for today, the market is very happy. 

ExxonMobil posted the fifth-highest quarterly profit for any public company in history. But the firm missed analysts' expectations by a dime per share.

The giant oil company reported profits of $8.4 billion - or $1.37 a share - for the first quarter. A year ago, the company's profits were $7.86 billion.

Analysts were expecting earnings of $1.47 a share, according to Thomson Financial, and investors sold off its stock when that didn't happen.

Still, the company will undoubtedly come under fire as Congress rails against high gas prices while companies like Exxon post record profits.

The company said its average sale price for crude oil in the U.S. was $55.89 per barrel in the first quarter. That's up from $42.70 a year ago, says the AP.

The AP reports that the Exxon's $88.98 billion in revenue in the first quarter is higher than the GDP of some of the world's major oil-producing nations, like the United Arab Emirates and Kuwait.

However, Exxon will likely point to the $4.8 billion that it invested in capital and exploration projects - up 41% from 2005, says the AP.

"In the first quarter of 2006, the results of our continuing long-term investment program contributed to a 5% increase in production," said Exxon CEO Rex Tillerson.

In addition, Tillerson announced yesterday that Exxon has earmarked $100 billion for new oil exploration projects in Africa, Russia and the Gulf of Mexico over the next five years, says the New York Post. 

Plus, Exxon's refining profits fell $0.2 billion in the first quarter.

But before you feel too bad for the oil-producing behemoth, remember that Exxon's 2005 profits were $36.1 billion - more than any company ever.

For the week ending April 22, U.S. jobless claims hit 315,000, rising by 11,000 from the previous week, and the unemployment rate remained steady at 4.7%, according to the Labor Department.

Economic experts had forecast a considerably lower rise in claims - something closer to 2,000. Yet they assert that even with so many more people filing for unemployment benefits, the labor market remains relatively strong.

"The four-week moving average of claims, which smoothes out weekly volatility, edged up slightly to 308,500 last week, compared to 305,750 the previous week. It was the highest level in three weeks," according to USA Today.

Based on a poll conducted by Reuters, Wall Street analysts "had expected 305,000 new claims last week, after an initially reported 303,000 the previous week."

It's too early to say, but the rise in jobless claims could indicate a weakening in the job market. Perhaps the slowing housing sector is beginning to shed jobs - the housing sector accounted for as much as 75% of job creation in the past five years. Stay tuned.

As part of his attempts to lay out a plan to reform the U.S. energy policy, President Bush has scheduled a sit-down for May 18 with top executives from the top three American automakers - GM, Ford and Chrysler.

The New York Times reports that, along with discussions on how to improve the nation's energy troubles, the topic of problematic pension payouts will also make the agenda.

The Times reports that the Big Three face a severe threat from competing Asian automakers, due - among other factors - to much higher retiree health-care costs, as GM and Ford fight to stop the bleeding in their core North American auto operations.

It's not entirely clear what help the federal government can provide, but The Times does say that the president will ask the automakers for help in reducing the country's ever-increasing reliance on oil consumption.

As recently reported in MoneyNews, GM was forced to sell the majority stake in its financial arm, GMAC, for a sum of $14 billion - money that served as a shot in the arm for the ailing automaker.

MoneyNews said at the time: "GM - which is set to lose its title as the world's biggest car maker - carries a debt approaching the size of Belgium's GDP. The company, which has 36,000 employees, first announced its plans to shed 7% of its payroll in November 2005. It lost $10.6 billion that year, due primarily to poor SUV sales and high labor and equipment costs."


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China's central bank is raising interest rates for the first time since October 2004. The interest rate hike - designed to curb China's rapid growth - will apply to new loans only, not deposits. The move pushed commodities lower and sent the dollar reeling. The central...
Thursday, 27 April 2006 12:00 AM
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