Several small banks yesterday cut their three-month fixed deposit interest rates by up to 25 basis points in reaction to hot money flowing back into the market betting on a yuan revaluation. The return of speculative inflows has sharply driven interest rates downwards in the wholesale money market, or Hibor (Hong Kong interbank offered rate). Three-month Hibor had been steadily rising since the start of the year to a peak of 2.78683 per cent on March 30, as speculators left the money market. However, in the past week, the rate has fallen from a high of 2.76464 per cent on April 15 to 2.35509 yesterday, as the money flowed back into the Hong Kong dollar. This drop in Hibor confirmed what Hongkong and Shanghai Banking Corp chairman David Eldon said on Thursday, that speculation on a yuan revaluation has caused an inflow of liquidity. He added that this would reduce upward pressure on interest rates. He was proved right as Wing Lung and Wing Hang banks were among those lenders to reduce their three-month fixed deposit rates by 25 basis points. Since March, most of the small banks have raised their prime rates 0.5 percentage point in reaction to a series of increases by the United States Federal Reserve and the rise in three-month interbank lending rates. The recent speculative inflows have also had an effect on the stock market with the Hang Seng Index rising 96.24 points, or 0.7 per cent, to 13,693.55 yesterday for a fourth consecutive day of increases, as fears of further sharp rises in interest rates subsided. The main reason for the return of hot money is speculators' belief that the mainland government is on the verge of revaluing the yuan following recently renewed pressure from the US. On Thursday, Fed chairman Alan Greenspan said the yuan's peg to the US dollar was starting to 'significantly' hurt the mainland's economy, and urged Beijing to 'move off this fix'. Also on Thursday, Rob Portman, US President George W. Bush's nominee for US trade representative, called for a revaluation of the yuan as he vowed to take 'a more aggressive approach' to China and would soon go to the mainland to 'deliver a strong message in person to Chinese officials'.
