Instant view: China raises interest rates for 3rd time in 2011

BEIJING Wed Jul 6, 2011 10:34am EDT

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BEIJING (Reuters) - China's central bank increased interest rates for the third time this year on Wednesday, making clear that taming inflation is a top priority even when as the economy slows gently.

Benchmark one-year lending rates will be raised 25 basis points to 6.56 percent, and benchmark one-year deposit rates will be raised 25 basis points to 3.5 percent, the central bank said in a short statement on its website.

Following are analysts comments on the move:

DUAN JIHUA, ANALYST, SEALAND SECURITIES, SHANGHAI:

"The interest rate rise is within our expectation, which shows the CPI in June could be really high.

"There are still some uncertainties hanging over the Chinese economy, so monetary policy may enter a wait-and-see period in the future.

"The rate rise, which is highly expected, would not give the market a hard blow."

COLIN BRADBURY, DAIWA CAPITAL MARKETS' MANAGING DIRECTOR/REGIONAL CHIEF STRATEGIST, ASIA EX-JAPAN:

"There's a definite chance that the numbers will disappoint, in terms of the CPI. The market's view is that June will probably be the peak month for CPI. It obviously doesn't tell anything about the future, but potentially, that June could be a little bit disappointing for the market.

"Equally again, the consensus is that inflation will peak in June. The consensus is another 25 basis points rate hike in July. And that's what we have, don't think there's anything too sinister to read into it. The question now is 'is this the last rate hike?', which is what the market certainly believes.

"There's a chance of another sell-off in Chinese banks tomorrow. but we certainly believe, if you look at the valuation profiles of the banks at the moment, they really are historically very cheap. But certainly some of the longer term investors, they might see this as a buying opportunity with a 6 month view. They might see this as a good entry point."

MICHAEL JANSEN, ANALYST, JP MORGAN, LONDON:

"The rate rise is going to reaffirm to the market that the Chinese are into this one for the long haul. This is not a short term, 'inflation is licked' yesterday story, which is what the market was almost trading on. They have been raising rates every two months, but missed the window last week. That shows that there will be more restrictions going forward. The big risk-on rally might have hit a stumbling block or two."

LIGANG LIU, HEAD OF GREATER CHINA ECONOMICS, ANZ, HONG KONG:

"Today's rate hike suggests that China's June inflation could be higher than expected and the Q2 GDP remains solid, consistent with our expectation. The rate hike will help the PBOC to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system.

"Meanwhile, the rate hike will have an asymmetric impact: It will help depositors more than borrowers as the market lending rate has already been priced far higher than the current policy benchmark rate.

"In addition, the very high reserve requirement has already put the banking system at a significant disadvantaged position relative to non-banking financial institution(s), which could expand quickly by taking the advantage of the regulatory arbitrage. This will then set off new risks in China's financial system.

"Looking forward, we believe PBOC's rate hikes are not yet done. There will be a need of another rate hike in Q3 so as to better stabilize rising inflation and better anchor inflation expectations."

LI JIEMING, BOND ANALYST, SEALAND SECURITIES, SHENZHEN:

"This rate hike appears to be the last for this year as the economy shows signs of a slowdown.

"With global commodity prices dropping and the base effect waning in the second half of this year, inflation is likely to peak in June.

"As far as the domestic market is concerned, bond yields have nearly fully factored in the interest rate hike as talk of such a hike has lingered for more than a month.

"The medium- and long-term bond yields should only have a space of 3 to 5 basis points to rise."

MICHAEL WIDMER, METALS ANALYST, BANK OF AMERICA-MERRILL

LYNCH:

"That should have been priced in. The market did not react particularly well to it, but there was always scope for more tightening to come through in the 2H. There were comments recently from Chinese policy makers about inflation being the key concern, so I'm not surprised."

"Perhaps one of the hopes is that you're going to get less tightening in the second half...(but) I don't think this will (happen) so you will have headwinds. There is still upside left on copper, but it's not the most bullish of all markets. I think $10,000 again, but not $12,000."

KATHLEEN BROOKS, RESEARCH DIRECTOR UK, EMEA AT FOREX.COM:

"This move was to be expected. Inflation pressures continue to rise and the Chinese authorities have signaled their intention to quash price pressures. Thus we expect today's move to have a limited impact on markets in the short-term.

"However, in the long term, investors' may start to worry that China is tightening rates just as growth is slowing down. Signs suggest the pace of expansion in the Asian powerhouse is slowing."

PRIYA BALCHANDANI, OIL ANALYST, STANDARD CHARTERED BANK, SINGAPORE:

"The government is very keen on controlling inflation, but absolute demand in China is going to continue growing. Gas oil demand is still going to go up at a steady pace.

"We will see somewhat of a drop in oil prices, but after the initial period of news absorption, I would expect the market to come back with caution."

CARL FIRMAN, ANALYST, VM GROUP:

"China has done a number of reserve requirement increases over the last several months, however you have climbing inflation, so in real terms you are not making any money by just holding cash.

"A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances. Their money is not earning anything, in fact you are getting negative returns now holding cash, whereas you are not getting that holding gold.

"I think China would need to raise rates higher and higher still until we start to see some kind of tapering off of their inflation figures."

CHEN XINYI, COMMODITIES ANALYST, BARCLAYS CAPITAL, SINGAPORE:

"We did expect a interest rate hike in the near term and that had been factored in to our view of a slowdown in demand from China, so I do not expect a major impact on prices. The next key event to watch out for in China is the State Council meeting in July which will set the tone for monetary policy in the second half of the year."

FREDERIC NEUMANN, CO-HEAD OF ASIAN ECONOMIC RESEARCH AT HSBC HOLDINGS PLC IN HONG KONG:

"China's inflation battle is almost at an end. Already, there are signs that price pressures are coming off. Today's rate hike may therefore have been the last in the cycle.

"In general, given that the authorities decided to raise rates also shows their confidence in the local economy. Worries over a hard landing on the Mainland are overblown.

"While imbalances exist, growth should hold up in the near-term, and the policy shift, after many months of tightening, will likely shift into neutral shortly."

WANG JUN, ECONOMIST AT GOVERNMENT THINK-TANK CCIEE, BEIJING:

"This is good news for the market, which has anticipated this move. The possibility of another rise in the rest of the third quarter is not big. Inflation could peak soon.

"Whether there will be more interest rate rises in the rest of the year will depend on inflation, if inflation comes down, there will be no need to raise rates. But if prices rebound, there could be further rate rises.

"The government may put more stress on safeguarding economic growth. We have seen this message from recent remarks of Chinese leaders."

QIAO YONGYUAN, ANALYST AT CEBM, SHANGHAI:

"The interest rate rise is largely in line with market expectation, as most institutions expected one interest rate rise in July.

"The move is aiming to curb the quickening inflation, which may climb to as high as 6.2 percent in the year to June.

"I think this will not flag an end of the tightening measures and the central bank could raise interest rate once more for the reminder of the year.

"The government is paying attention to high prices of pork. In addition, other the costs of non-food items also keep rising, which could add more pressure to inflation in the coming months."

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