What China's rate rise really means
Read between the lines of the mainland's surprise interest rate rise announced last week and the conclusion is simple: the economy is not slowing down as planned.
The revelation puts to rest months of talk about a 'soft landing', and draws attention to the growing risk of systemic instability if economic expansion continues at a breakneck pace, according to the consensus among analysts.
'A rate hike is an implicit admission that administrative controls - the government's preferred tool for keeping overheating pressures at bay - are not as effective as previously thought,' according to research by the foreign exchange strategy team at Merrill Lynch.
The rate hike of 27 basis points brings the one-year lending rate and the one-year deposit rate to 5.58 per cent and 2.25 per cent respectively. Lehman Brothers' economist Rob Subbaraman believes the policy shows Beijing is growing increasingly concerned about inflation. Consumer prices rose at an annual rate of 5.2 per cent in September, while factory prices rose 7.9 per cent.
'Authorities may have hiked [the rates] because of concern that the real deposit rate is negative and the real lending rate is virtually zero,' Mr Subbaraman said.
The rate change also signals Beijing is getting closer to a flexible exchange rate system. The mainland economy is expected to slow to 8 per cent gross domestic product growth next year. Economic growth slowed from 9.6 per cent in the second quarter to 9.1 per cent in the third quarter.
However, third-quarter data also revealed rapid increases in China's industrial output, fixed-asset investment, new lending, and money-supply growth - which point to an acceleration of the economy rather than a slowdown, according to ABN Amro strategist Eddie Wong. Last week's rate hike will be the first in a series, he said.
'This major policy shift should be positive to the cooling down in the investment bubble and the economy longer term, but we believe it will be negative for the stock market in the short term,' he said. The change increases the odds of a yuan appreciation, he said.
JF Asset Management is expecting little economic slowdown from the rate hike, arguing administrative measures are the key policy instrument for influencing domestic demand. It expects the one-year lending rate will not be too far off consensus expectations of 6 per cent, a year from now.
'We are likely to see the biggest corrections occurring in the commodity-related stocks and sectors such as the oil majors,' the bank said.
