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Chinese market reacts moderately to interest rate rise
Latest Updated by 2006-08-23 09:11:38
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Of what benefit is the interest rate rise to ordinary people?

China's securities and foreign exchange markets reacted moderately Monday to the central bank's announcement of a rise in interest rates.

On Friday the People's Bank of China (PBOC), or central bank, upped one-year benchmark deposit and lending interest rates by 0.27 percent.

The Shanghai Stock Exchange (SHSE) composite index dipped 26.9 points on Monday morning, or 1.68 percent, to open trading at 1,565.457 points. The composite index of another Chinese bourse, the Shenzhen Stock Exchange (SZSE), dropped 78.99 points, opening at 3,835.825 points.

Despite the opening slump, both markets quickly rallied. The SHSE composite index closed at 1,601.15 points, up 3.13 points over the previous close, and the SZSE closed at 3,932.17 points, up 7.89 points.

Total turnover at the SHSE reached nearly 12 billion yuan (1.5 billion U.S. dollars), with the SZSE chalking up over 7.3 billion yuan.

Profits from the Chinese stock market are more attractive to investors than profits related to interest rate rises, said Zhang Liqun, a research member of the macro-economy sector of the Development Research Center of the State Council.

Zhang predicted that the interest rate rise would have little effect on the Chinese stock market.

Market observers pointed out that the stock market was expecting the interest rate rise, so the effect was minor.

The central bank raised loan rates by the same margin in late April but did not change deposit rates.

This time the central bank raised both the deposit interest rate and the lending interest rate, generating new pressure for a further appreciation of the renminbi (RMB).

The central parity of the RMB against U.S. dollar reached 7.9698 to 1 on Monday, 38 basis points higher than on the last day of trading and the second highest figure since China launched the reform of the RMB exchange rate system last July.

The yuan has traded against the dollar in a 7.9700-7.9640 range. The yuan closed against the U.S. dollar at 7.9656.

Zhang Liqun expected that the higher interest rate would have little effect on China's real estate market.

He said the interest rate rise will raise costs both for housing developers and for those contracting loans to buy housing. This will help highlight the real market demand for housing.

But as the interest rate rise range is modest, the effect on the real estate sector will not be significant, said Zhang.

China raised banks' deposit reserve ratio by 0.5 percentage points last Tuesday, just four days before the interest rate rise move.

Zhang said that the increase in the banks' deposit reserve ratio will force banks to tighten liquidity management and the increase in the benchmark interest rate will raise the cost of capital. Both measures aim to curb the excessive growth of money and credit.

He believes that the key way to reduce money supply is to dilute the international payment imbalance. Measures to be taken include the step-by-step appreciation of the RMB, foreign investment policy adjustments, increased imports of key technical components and resources and expanded overseas investment.

Zhang emphasized that the goal was still a long way off and said the RMB should not appreciate too quickly or "it will damage the economy".

Chinese economists are divided about whether there will be further increases in interest rates.

Zhang said that China's interest rate hikes should be limited to a certain range as the current oversupply of money reflects a real decrease in interest rates.

In this sense, excessive increases in interest rates would confuse basic market mechanisms, he said.
Editor: Yan

By: Source: China View website
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