International | May 01 2006
By Chris Shaw (Tokyo)
With most experts suggesting the move by the people’s Bank of China to lift interest rates will not slow down economic growth, it would be easy to pass off the decision as something of little importance.
Such an approach would be misguided though, as the same experts suggest the decision is in fact significant as it indicates further measures designed to slow the amount of excess liquidity in the Chinese financial system are likely.
UBS is one to take such a view, suggesting while the economic impact of the rate increase will be minimal it is a signal to the banking sector the central bank is getting more serious about slowing the rate of lending growth. This means further measures are likely, with changes (read increases) to reserve requirements and additional administrative actions likely to be introduced.
Citigroup agrees, pointing out the move to lift interest rates in itself will have no direct impact on liquidity, so changes to the reserve requirements of the banks will almost certainly follow.
Barclays Capital takes a similar view, noting the introduction by the central bank of additional guidance for the banking sector is designed to moderate the pace of lending and improve the level of credit risk management. Combining these measures in Barclays’ view should achieve the dual goal of stopping the Chinese economy from overheating by slowing the amount of investment lending being made.
At the same time, Barclays suggests it should allow growth to moderate to more sustainable levels, leading it to predict GDP growth will slow to 9.4% in 2006 and about 9% in 2007. It adds the policy change by the People’s Bank has another goal, as the lack of any change in deposit rates should have the effect of slowing speculative capital inflows. This in turn will give the central bank better control over the rate of appreciation of the Chinese currency.
With this in mind, Barclays is forecasting the trading band for the renminbi will widen in coming weeks to about 1.5%.
Others agree with such an outcome, both UBS and Citigroup suggesting the speed of revaluation for the currency is likely to increase going forward given the CNY/RMB remains undervalued.
This would, in UBS’s view, help address the issue of the trade balance, as the ever-increasing trade surplus remains an issue for not only the Chinese but the world economy.
Citigroup suggests the timing of the rate increase was also significant, as it should prove to be beneficial for the Chinese equity market as it will provide further reason for some profit-taking following weaker earnings in the half and the impact of a significant increase in the number of share placements made.
In Citigroup’s view the Chinese market could see falls of up to 10% in the property, consumer and cyclical sectors, so investors in the market should focus on the large cap stocks, where earnings quality is higher.
