International | Dec 06 2007
By Chris Shaw
For some time Chinese authorities have been progressively tightening monetary policy in an attempt to bring the economy’s growth under control and according to Danske Bank additional tightening measures are likely in the short-term.
The bank points out the Chinese government indicated a shift in policy at the recent Central Economic Work Conference, at which it decides its economic policy targets for the coming year.
The statement of an intention to implement “forceful measures to strengthen liquidity control†is, in the bank’s view, a sign policy is shifting from moderately tight to tight, which suggests the People’s Bank of China (PBoC) may become even more aggressive with respect to monetary policy.
Danske Bank sees the reasoning behind the policy shift, pointing out in real terms policy remains accommodative given the recent increase in inflation means real interest rates are quite low, a situation being exacerbated by the fact the currency is still undervalued.
With exports performing well in recent months and domestic demand still strong the bank suggests Chinese economic growth may have accelerated of late, so to counter this it expects the PBoC will likely hike both the benchmark deposit and lending rates. Currently the bank expects two 0.27% increases in both, but it points out the risk is to the upside.
The data also suggest scope for an acceleration in the rate of appreciation of the currency, so a one-off major revaluation cannot be ruled out in the bank’s view. It also notes there are rumours of a lending freeze through to the end of the year.
Investment demand is most likely to be hit assuming such measures come through, with the construction industry one of the more exposed according to the bank. This may flow through to demand for commodities such as iron ore and steel as they are most sensitive to changes in activity levels.
