China investors undeterred by chill
measures By Olivia Chung
HONG KONG - China's nearly 100 million
investors are not deterred by the government's
latest belt-tightening moves, including raising
interest rates and the bank reserve ratio and
widening the yuan's trading band - all partly
designed to tame the sizzling stock markets.
The Shanghai Composite Index, which tracks
yuan-denominated A-shares and hard-currency
B-chips, opened 3.2% lower at 3902 on Monday
morning in a reaction to the measures announced by
the People's Bank of
China (PBoC), the central bank, late last Friday.
However, bullish investors soon pushed the
index up again, reversing the downturn to gain
about 1% at 2.30pm.
Economists believe the
monetary policy and exchange rate measures adopted
by the central bank are targeted not only at the
stock markets but also at the country's overall
economy and record trade surplus, so the impact on
the stock markets is not so direct. They also
believe the latest measures are not enough to cool
down the economy. Therefore, the central bank is
expected to further raise rates and the deposit
reserve ratio.
The PBoC said on Friday
evening that it would raise one-year deposit and
loan interest rates by 0.27 and 0.18 percentage
points respectively, to 3.06% and 6.57% as of May
19. The central bank would also raise the reserve
requirement ratio for commercial banks by 0.5
percentage point to 11.5% as of June 5. This
is the first time in 10 years that the central
bank has simultaneously raised the benchmark
interest rates and the bank reserve ratio.
The move aims to "strengthen liquidity
management in the banking system, rationalize the
growth of lending and investment and maintain
price stability", the central bank said in a
statement on its website.
"The problems
currently facing China's economy are so complex
that a single adjustment cannot on its own
accomplish all the objectives of macro control
policy," said Wang Tongsan, a researcher at the
Chinese Academy of Social Sciences (CASS).
"Raising the interest rates and bank
reserve ratio at the same time will help prevent
the fast-growing economy from overheating and
ensure economic stability," said Wang.
"The decision is reasonable and within
people's expectations," said Yin Jianfeng, a CASS
financial expert. "By doing so, the central bank
attempts to impose curbs on excessive investment
and the speculative bubble on the stock market,
but it is too early to say whether the move will
be effective."
As Chinese shares
continuously hit new highs, the mainland's two
bourses saw their market value surpassing the
country's savings deposits on May 17.
"We
can wait and see whether the interest rate rise
brings people's money back from the stock market
into their bank accounts," said Yin. "That's
possible, but hardly probable."
Chen
Xingdong, deputy managing director and chief
economist of BNP Paribas Peregrine Securities,
said, "Everyone knows the increase of the
benchmark rate by 27 basis points is sure not
enough to cool the markets. And the government is
trying bit by bit to cool down the stock markets,
which are flush with excessive liquidity, and is
sending a clear message that more measures will
come to cool the market."
Jun Ma, chief
economist for Greater China at Deutsche Bank Hong
Kong, said the latest moves show the PBoC's
increasingly aggressive attitude in applying
monetary policy instruments to regulate the
economy.
"The fact that the rate hike is
an asymmetric one and is done simultaneously with
a rising reserve requirement increase suggests
that the PBoC is somewhat more hawkish than market
expectations and will likely continue its strong
tightening bias in the coming quarters," he said.
"We anticipate another rate hike and three
more reserve requirement ratio increases in the
remainder of this year, bringing the reserve
requirement ratio to 13% by the end of this year.
We do not rule out the possibility that the next
rate hike will also be asymmetric."
BNP
Paribas Securities economist Issac Meng expected
the PBoC would further raise interest rates in
July, since the government is taking a progressive
approach to tame liquidity growth and cool the
stock markets.
"The government does not
want to kill the stock market, but wants the
market to grow healthily and steadily."
As
for short-term market impact, this set of policies
should be somewhat negative to banks and real
estate shares, Meng and Ma said.
Hong Kong
tycoon Li Ka-shing, Asia's richest man, and
Chinese central bank chairman Zhou Xiaochuan last
week warned that a stock market bubble may be
building.
"We don't exclude any
possibility to make further use of monetary
instruments, including reserve requirements, open
market operations, interest rates or other
instruments," Zhou said as he addressed the
closing session of the African Development Bank's
annual meeting last Thursday.
China has
raised interest rates five times since 2004 and
the bank reserve ratio eight times since 2006.
But the country's urban fixed-asset
investment was 2.26 trillion yuan (US$290 billion)
in the first four months of this year, up 25.5%
from the same period in 2006, according to the
National Bureau of Statistics.
The figure
compares with a 25.3% rise in the first quarter
and last year's growth rate of 24.5%, suggesting
there had been no fundamental changes in the
overall trend in the country's investment growth.
"As far as the central bank is concerned,
the economy is moving too quickly. There is too
much lending and too much liquidity, which is why
it has adopted a series of austerity measures,"
said Hu Yuhang, an analyst with CITIC Securities.
The PBoC also widened the daily interbank
trading band of the yuan exchange rate against the
US dollar from 0.3% to 0.5% from May 21. Analysts
expect that this will speed up the appreciation of
yuan.
The mainland's trade surplus for the
first four months of the year was $63.31 billion,
88% more than a year earlier. The overall trade
surplus jumped 74% last year to a record $177.5
billion, flooding the economy with excess
liquidity.
Chinese Vice-Premier Wu Yi will
meet US Treasury Secretary Henry Paulson for the
dialogue on May 23-24, which is aimed at bridging
trade differences. Beijing has sent a trade
delegation to buy more than $10 billion of US
goods ahead of this week's summit to smooth the
way for the talks.
The yuan has gained
nearly 5.8% against the greenback since it
appreciated 2.1% when the dollar peg was scrapped
in July 2005.
Olivia Chung is a
senior Asia Times Online reporter.
(Copyright 2007 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
