As China raises rates, don’t for­get the yuan, says an­a­lyst

The Pak Banker - - 6i Nternational -

BEI­JING: 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.

Even as a move on Christ­mas Day was a sur­prise, the 25-ba­sis point in­crease in bench­mark one-year in­ter­est rates an­nounced on Satur­day was in line with a ma­jor­ity view in a Reuters poll ear­lier this month. Most econ­o­mists had pre­dicted that China would raise rates by the end of this year and the con­sen­sus was for two more in­creases in the first half of 2011. Nor­mally ap­pre- hen­sive of tight­en­ing, in­vestors had be­gun to worry about the op­po­site in China-that the govern­ment was de­lay­ing the in­evitable for too long and that the ul­ti­mate reck­on­ing with in­fla­tion would be more painful as a re­sult.

"As long as tight­en­ing is not too much lagged be­hind the curve, mar­ket sen­ti­ment should im­prove grad­u­ally in the first half of 2011," Shen Ming­gao, an econ­o­mist with Cit­i­group, said in a re­search note.

Shen echoed Ba in say­ing that faster yuan ap­pre­ci­a­tion would play a big­ger role in the cam­paign against in­fla­tion.

That view has been no­table by its ab­sence in fi­nan­cial mar­kets of late. In­vestors are pric­ing in just a 2.4 per­cent rise in the yuan ver­sus the dol­lar over the next year, ac­cord­ing to off­shore for­wards. In 2007-08, when China was last bat­tling in­fla­tion, the govern­ment let the cur­rency climb more than 7 per­cent in six months.

Al­though price pres­sures are less se­ri­ous now, it would not be sur­pris­ing to see a mini burst of yuan ap­pre­ci­a­tion in the com­ing months.

In fact, an in­for­mal poll of on­shore cur­rency deal­ers over the last week, showed many of them ex­pect the yuan to gain roughly 6 per­cent over the next year, hit­ting 6.25 per dol­lar by the end of 2011.

Some traders thought the cen­tral bank hinted at this on Mon­day by nudg­ing the yuan up against the dol­lar.

"Let­ting the yuan rise right af­ter a mon­e­tary tight­en­ing step is a rare phe­nom­e­non, as the govern­ment typ­i­cally hopes to curb spec­u­la­tion of yuan ap­pre­ci­a­tion right af­ter such a step," said a se­nior trader at a ma­jor Asian bank in Shang­hai.

"The govern­ment ap­pears thus to be giv­ing a sig­nal that it will use both in­ter­est rates and the ex­change rate to fight in­fla­tion, in­clud­ing im­ported in­fla­tion." -Reuters

BAGHDAD: Iraq's Oil Min­is­ter Ab­dul Ka­reem Luaibi holds a news con­fer­ence dur­ing a cer­e­mony pre­sent­ing him as the new oil min­is­ter at the min­istry head­quar­ters. -Reuters

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