CHINA: Central Bank lifts interest rates again
Updated
China's Central Bank has raised interest rates for the fourth time this year. Key deposit and lending rates have gone up in an effort to stabilise inflation which is running at a decade high. But if the Bank of China also intended to cool down the steaming stock market, the strategy seems to have failed.
Presenter: Karon Snowdon
Speakers: Paul Cavey, head of China Economics with Macquarie Bank in Hong Kong.
SNOWDON: The interest rate banks pay to depositors rose by 27 basis points to 3.6 per cent. The lending rate or the interest charged on loans went up by a lower 18 basis points to just over 7 per cent. Two different rate rises meant to achieve two things. First the Bank of China wants to encourage investors to put some money into the banks instead of the stock market and second to rein in credit by squeezing bank margins and making lending a bit less attractive. Paul Cavey , Head of China Economics at Macquarie Securities in Hong Kong says the strategy will have little impact.
CAVEY: No.
SNOWDON: Quite simply?
CAVEY: Yes, so real interest rates are still very low, asset markets still look much more attractive. I mean essentially if you leave your money in a bank right now you're losing money, your money is going down in value. So there's no point holding on. So at the moment it doesn't really make much difference, and one of the reasons why the market seems to be shrugging off the effect of the change.
SNOWDON: China's main stock market took little heed of the Central Bank's good intentions, closing in positive territory and within striking distance of the 5,000 point mark. Mainland China shares have felt almost none of the recent turmoil on world stock markets. The Shanghai index is up 80 per cent this year on top of the 130 per cent leap last year. So as well as an inflation rate of more than 5 and a half per cent, that sense of immunity from the global upheaval has Beijing authorities worried. The Bank of China will be watching what the US Federal Reserve now does with its interest rates. After a drop in the discount rate a week ago a cut in the more significant federal funds rate is on the cards and will make China even more attractive for foreign funds.
CAVEY: This move right now is significant, basically because it's the fourth increase in interest rates this year so rates have risen by more than 100 basis points. But the other thing is that the external environment has now shifted, it looks like the fed is going to be cutting rates. So that differential with the rest of the world that China has been very keen on holding onto over the course of the last two or three years, it seems that aim has been abandoned. Now what this really shows is that China thinks it has monetary policy independence, that China can have a very undervalued currency, it can though raise interest rates because capital controls will keep money out of China. So it's actually an important shift in policy and in thinking in China. It's also though risky because I think the fed will be cutting rates and as a result the ability of China to keep capital flows out is really going to be tested over the course of the next three or six months.
SNOWDON: Has it got a strategy for long-term fix?
CAVEY: That's a very good question. What China would really like is US growth to slow and the US to raise interest rates further. What it doesn't want is what seems to be happening at the moment is the US growth to slow but the US to be cutting rates, that's not a very good environment for China because it increases pressure on the currency. I mean I think what basically the long-term strategy is a slow move away the export level of model of growth that China's followed over the last 25 years. But it is a slow move because they think a more rapid move will cause unemployment and dislocation. And what they don't want to do clearly is to have to move the currency, and so the problem with the environment at the moment or sub prime issues is that I think it will increase pressure on the currency.
