China: Growth Reacceleration Triggered Rate Hike
[any comments Yiwu? mish]
Denise Yam / Andy Xie (Hong Kong)
Growth reacceleration and speculation triggered the first rate hike in nine years
The People’s Bank of China (PBoC) announced a hike in interest rates with effect from October 29. We believe that the recent reacceleration in growth, increased speculation in the property market, and persistent inflation amid the authorities’ reluctance to lift rates last month had raised concern that the economy could again overheat. The latest move sends a strong signal that the government is not yet loosening its grip on the pace of economic growth, and indicates the determination to cap speculation and runaway growth in order to lead the economy towards a more sustainable path of development for the medium term.
One-year lending and deposit rates raised by 27 bps; lending rate ceiling removed
The benchmark 1-year lending rate is raised by 27 basis points, from 5.31% to 5.58%; so is the 1-year deposit rate, from 1.98% to 2.25%. Rates for longer tenures are raised more, with the 5-year lending rate up 36 bps to 6.23% and the 5-year deposit rate up 81 bps to 3.6%. Except for credit cooperatives, financial institutions will be allowed to set lending rates above the benchmark rate with no ceiling, against a 1.7 times cap imposed before, while the 0.9x floor to lending rates remains in place. A 2.3x ceiling will continue to apply to lending rates at credit cooperatives.
Economic and currency implications: Watch the property market
We believe the most immediate impact from the rate hike will be seen in property prices. Expectations for slower economic growth, tamer inflation, and higher deposit interest rates will encourage households to save more and cool their demand for property, in our view. Meanwhile, we do not interpret the rate hike as a signal of an imminent change to the fixed exchange rate regime. The rate hike is only consistent with catching up with the 75-bp increase in the US under the pegged regime, and does not necessarily lead to more inflows into renminbi. In fact, reduced speculation on asset prices amid tighter liquidity conditions could help ease appreciation pressure on the currency, in our view.
More tightening could be ahead
We believe that today’s announcement sends a strong signal of determination to contain speculation and slow growth in China. It marks a shift from administrative to market-based measures in managing the economy, and could be the first of several steps upwards in rates. China’s interest-rate cycles are traditionally long; the 1-year lending rate was raised by 342 bps in total during the May 1993-July 1995 tightening cycle. We remain convinced of a significant cyclical adjustment ahead. |
