China Rate Hikes And The Yuan

China is tightening after a record expansion of credit countered the effects of the financial crisis. The nation lags behind counterparts from Malaysia to South Korea in boosting borrowing costs after raising the benchmark interest rate for the first time since 2007 in October.

Rate hikes are imminent and expectation is high by the end of the month, with more to come in 2011 according to a Hong Kong-based emerging-market strategist at Royal Bank of Canada
As a result, The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges is expected to slip accordingly.

With the rate increase, the yuan may strengthen at a “slightly” faster pace before year-end, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank.

‘Fast’ Growth

The one-year lending rate is at 5.56 percent after October’s quarter-point increase. Inflation pressures have been highlighted by companies including McDonald’s Corp., the world’s largest restaurant chain, pushing up prices.

South Korea has raised rates twice this year, Malaysia three times, India six and Thailand third in 2010.
At Bank of America-Merrill Lynch, economist Lu Ting said that continuing a “proactive” fiscal stance while tightening monetary policy will allow the government to maintain economic growth of around 9 percent. The nation’s expansion was 9.6 percent in the third quarter from a year earlier.

Inflation Jumps

China October’s inflation rate of 4.4 percent was the highest in 25 months and the nation has had record property-price gains this year. Luxury-home costs in Beijing and Nanjing and so- called mass-market prices in Shanghai and Shenzhen have become “increasingly disconnected from fundamentals,” according to an International Monetary Fund study released today.

The announcement from the Politburo, the 25-member body that oversees the Communist Party and policy-making, came ahead of an annual economic work conference that will set guidelines for the coming year. That event may take place Dec. 10-12, Xinhua said.

Concern that monetary tightening will cut corporate profits and damp growth spurred a 6 percent sell-off in China’s benchmark stock index in the past month.

Officials have been shifting policy ahead of the change in terminology. Besides raising interest rates, the central bank has ratcheted up banks’ reserve requirements this year and ended the yuan’s temporary peg to the dollar.

Today’s announcement of a shift to a “prudent” policy had been predicted by economists including at Deutsche Bank AG. and China International Capital Corp. Central bank officials and advisers had also used the term.

( Source : Reuter )