The mainland's weekend rate increase was aimed partly at cooling speculation in the country's booming stock markets. Yesterday's 2.88 per cent rise in Shanghai's A-Share Index shows it is too small to succeed.
Quelling stock speculation was not the only reason the People's Bank of China raised interest rates. A spate of data from the first two months of the year appeared to indicate an economy once again dangerously on the edge of overheating.
Strong demand for the mainland's exports helped push industrial production up 18.5 per cent in January and last month, compared with the same period the year before. As a result, and despite fewer working days, the country's exports shot up 51 per cent year on year in February and the trade surplus for the month hit US$23.8 billion, the second-highest figure on record.
Despite the central bank's repeated efforts to drain liquidity, much of the country's export earnings still seem to be finding their way into its financial system. Money supply increased 25 per cent in February over January and new bank loans shot up 21.8 per cent.
The surge in cash is helping to fuel a rebound in fixed asset investment, which rose 23.4 per cent in January and February, compared with the same period last year, up from 13.8 per cent in December.
Meanwhile, inflation is ticking higher, with the consumer price index up 2.7 per cent year on year in February, compared with 2.2 per cent in January.
Although the rise in inflation was concentrated in volatile food prices and the underlying trend rate remains modest, the February increase in consumer prices made an interest rate increase imperative.
Before Saturday's announcement, the mainland's benchmark interest rate on one-year household deposits was just 2.52 per cent, below February's inflation rate. In other words, ordinary Chinese, who have 16 trillion yuan in deposits with the country's banks, were seeing the real value of their savings diminish. It is little wonder they have been punting on the stock market in increasing numbers in recent months.
Saturday's 0.27 percentage point rate increase, which lifts the one-year deposit rate to 2.79 per cent, restores the real return on bank deposits to positive territory, but only just.
Clearly, the central bank's move has done little to discourage the mainland's legion of stock investors. Jun Ma, the chief economist for China at Deutsche Bank, says the country's A-share markets have in the past tended to slump 3 per cent to 6 per cent in two days after a rate increase. Yesterday, Shanghai's A-Share Index defied expectations by bouncing back from an early decline to end the session 2.88 per cent higher.
If the central bank wants to achieve its objectives of reining in investment, containing inflation and stabilising the financial markets, it will have to raise rates further. Private-sector economists predict another 27 basis point rise in the next three months.
Larger increases are unlikely. But whether such a modest rise can succeed in dampening speculation in the stock market remains extremely doubtful.