CHINA’S THREE RATES

ANALYSIS: AS CHINA RAISES RATES, DON'T FORGET THE YUAN

Kevin Yao and Simon Rabinovitch

Reuters, December 27, 2010

BEIJING (Reuters) - China was Grinch-like in raising interest rates on Christmas Day, but in fact investors have good reasons to be grateful.

The government provided much-needed reassurance that it was determined to rein in price pressures -- and a salutary reminder that more yuan appreciation than the market expects could be in the offing.

The key take-away from the rate increase, China's second in just over two months, is that Beijing is softly, softly pulling every tightening lever within its reach.

"The central bank will only raise rates in small and steady increments in the coming months," said E Yongjian, an analyst at Bank of Communications in Shanghai.

"The yuan will also steadily climb next year, serving as one tool to alleviate the inflationary pressure," he said.

Ba Shusong, an economist with the Development Research Center, a think-tank under the cabinet, provided a neat summary of the government's strategy for taming consumer prices, which rose 5.1 percent in the year to November, a 28-month high.

"The rhythm of policies will become regular, something we call the simultaneous implementation of the three rates: banks' required reserve ratios, interest rates and the exchange rate," he said in comments published in the Economic Information Daily, a Chinese-language newspaper, on Monday.

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