Wednesday 20 October 2010

RATE INCREASE IN CHINA

China Real Time Report

ECONOMISTS REACT: CHINA RATE INCREASE

China RealTime Report, October 20, 2010

Today’s decision suggests the acceleration in growth and official worries about property and inflation are more serious than anticipated. Moreover, while tightening is expected to contain growth and inflation over the next 2 to 4 quarters, more serious economic and financial reform is needed to resolve medium-term risks. - Ben Simpfendorfer, Royal Bank of Scotland

We believe this is a positive development…The rate hike only increases borrowing costs by a small margin, but its signalling impact is much more meaningful. It conveys at least two important messages: 1) top policy makers in China are watchful of the increasing risks on inflation, especially at a time when energy price deregulation is undergoing more quickly…and 2) Chinese leaders probably see less of a risk of a “double dip” in global growth and a severely negative impact on the Chinese economy. Meanwhile, we still expect the divide in the policy mix to continue, with easing in investment and fiscal policies to help support growth stability, and a tightening bias in monetary and property policies to manage inflation and asset inflation risks – Helen Qiao & Yu Song, Goldman Sachs

We expect this rate hike to be the first of a series to come, before interest rates are normalized to pre-crisis levels… Since the rate hike caught the market by surprise, we think the initial reaction is likely to be negative, especially for the property and related sectors…. However, in general, we think the market should see the rate hike as a speed bump on the road, as it also reflects the government’s confidence in the strength of economic activity. – Tao Wang & Gao Xu, UBS

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