International | Apr 28 2006
by Chris Shaw (Tokyo)
In Asia the concept of "face" is very important, with actions carefully thought out to either save oneself from embarrassment or to prevent embarrassment to another party.
In the view of DBS the move by the Chinese central bank to lift interest rates in an attempt to slow down the economy is more a symbolic or face saving gesture, as a serious attempt to slow down growth would require more significant tightening to be successful.
DBS also suggests the form of the policy response was chosen to provide a boost to the banking sector, as by lifting interest rates but holding deposit rates steady banks will generate higher margins, whereas the more widely expected action of lifting reserve requirements would have had the opposite effect.
In DBS’s view further action will be undertaken to try to slow down the pace of economic growth, but it is unlikely such action will be aggressive as inflation at around 2% does not pose a serious problem. It suggests where more action is possible is from regional authorities, as the move by the central bank is likely to act as a good wake up call to address problems in the regional economies such as the potential for housing bubbles.
While further tightening is likely going forward, DBS suggests the underlying issue of upward pressure on the currency will remain.
