Investors defy sell-off prediction after rate rise

PUBLISHED : Thursday, 21 October, 2010, 12:00am
UPDATED : Thursday, 21 October, 2010, 12:00am

A surprise interest rate rise failed to knock the A-share market yesterday as investors bet on an increasing inflow of speculative capital that could offset the negative impact of tighter monetary policy.

The Shanghai Composite Index stayed flat, edging up 2.1 points or 0.07 per cent to 3,003.95 in volatile trading. The index fell as much as 2 per cent in the morning as the higher interest rates sparked fears about an asset bubble developing.

The Hang Seng Index finished in the red; real estate developers and resources firms led the decline. The index tumbled as much as 1.9 per cent in the morning before closing down 0.87 per cent, or 207.23 points, at 23,556.5. 'The interest rate increase was a sign that a series of tightening moves are in the pipeline,' said Essence Securities' analyst Liu Jun. 'Yet, the market just ignored the warning signal.'

Beijing is expected to release a spate of third-quarter economic reports today. The timing of the unexpected rate rise on Tuesday evening - a quarter per cent increase in benchmark one-year deposit and lending rates - was seen as a cautionary signal from the government ahead of the releases.

Analysts expected the higher interest rates to result in a selling spree after the Shanghai index jumped 15 per cent between September 30 and Tuesday. But a fund manager said the afternoon rally proved liquidity would not drain in the near future since an influx of hot money was likely to gravitate to the mainland.

The mainland market was one of the world's worst-performing this year before a rally buoyed by capital inflows since September 30 helped the key indicator recover most of its lost ground. As of yesterday, the Shanghai Composite Index was still 8.3 per cent down on the year, and nearly 30 per cent off last year's close in July.

'The rate increase did cause the market initial concerns,' Emerson Yip, a fund manager at JPMorgan Asset Management, said. 'But investors seem to be saying this is not an inflection point and that we are still going to have an environment where we have very strong economic growth and supportive monetary policy.'

Regional markets were mixed yesterday. Japan's Nikkei-225 Index slid 1.7 per cent and Australia's S&P/ASX 200 Index fell 0.66 per cent. But the Korea Composite Index climbed 0.7 per cent and Taiwan's Weighted Index jumped 0.97 per cent.

Ronnie Chan Chichung, chairman of Hang Lung Group, yesterday said Beijing's new cooling measures last month demonstrated its intent to curb soaring property prices. He believes more measures will follow and expects an 'adjustment' in residential prices.

In Shanghai, property stocks were among the biggest losers yesterday as they were believed to be the main victims of a new round of monetary tightening. The property sub-index fell 3.5 per cent.

Additional reporting by Yvonne Liu