China Rate Hike - Prime Minister: "Growth is unstable and unsustainable"

Discussion in 'Wall St. News' started by makloda, Mar 17, 2007.


    The Associated Press March 17, 2007, 7:06AM EST text size: TT
    China to raise key interest rate

    China's central bank said Saturday it will raise key interest rates by more than a quarter percentage point in a move to cool torrid economic growth.

    The 0.27 percentage point hike in one-year deposit and lending benchmark rates will go into effect Sunday, the People's Bank of China said.

    That would raise lending rates to 6.39 percent and deposit rates to 2.79 percent, the bank said in a statement on its Web site.

    The new rates will "promote the good, fast development of the national economy" by guiding an increase in credit and investment, preserving price stability and steady operation of the financial system, the statement said.

    The rate hike, the fourth in 12 months, is the latest in a series of measures China's leaders have taken to slow an economy they fear is running at an unsustainable pace. Four years of double-digit economic growth, largely driven by investment and exports, have left the financial system flush with cash.

    In recent months Chinese leaders have been sounding the alarm about excessive lending, worried that it would push growth too fast and thereby accelerate recently rising inflation or touch off a debt crisis if imprudently made loans go bad.

    Low deposit rates have also encouraged a rush by ordinary Chinese into the country's buoyant stock markets, exposing them to greater risks as a two-year bull market begins to flag.

    Premier Wen Jiabao, at a news conference Friday, ticked off a list of economic problems, citing excessive investment, credit and liquidity and swelling foreign exchange reserves.

    "My mind is full of concerns," he told reporters.

    Even before Saturday's rate hike, Chinese leaders had been haranguing banks to tamp down lending and twice this year raised the amount of money that banks must set aside as reserves in order to discourage lending. Banks have been compelled to buy special bonds to soak up still more of the credit pool.

    Economists had expected further rate hikes after the government reported this past week that industrial output and spending on factories and other assets was up sharply despite efforts to cool off a boom in construction and investment.

    Overall investment in assets rose by 23.4 percent in the January-February period, while spending on new real estate grew even faster, expanding by 24.3 percent, according to the National Bureau of Statistics.

    President Hu Jintao's government wants high growth to reduce poverty and has tried to avoid sweeping measures such as interest rate rises that might slow the economy, instead targeting industries that are believed to be growing too fast.

    Beijing has had only mixed success in efforts to reduce reliance on exports and investment by encouraging Chinese to spend more on travel, housing and consumer goods.

    The government on Monday reported that China's trade gap in February reached its second-highest level on record, reaching $23.7 billion, up 32.9 percent from the same period of 2006.

    A shocking announcement by China's Premier Wen Jiabao that his country's growth was "unstable and environmentally unsustainable" sent markets in Asia into the red Friday, reversing earlier gains. Since the beginning of the year, China's premier has become increasingly critical in public of the country's economy. But Friday's comments included the most severe criticism yet.

    "China's investment growth is too high, lending growth too fast, liquidity excessive, and trade and international payments very imbalanced," Wen said, Bloomberg reports. "The biggest problem in China's economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable."

    The timing of the announcement is reminiscent of Wen's Chinese New Year holiday declaration at the end of February to crack down on corruption and fraud on local stock exchanges. Many say that was responsible for the massive 8.8% declines in the Shanghai stock exchange on Feb. 27, as fears brewed over the holidays while the markets were shut.

    Asian markets closed down tamely Friday considering the severity of Wen's comments, prompting fears that the real impact will be felt early next week. As was the case in February, investors will have two days to mull Wen's latest announcement, which many see as compounding uncertainty over the valuation of China's markets.
  2. joesan


    The Chinese stock index rose from 1000 points to 3000 points in one year, very curious to know what will be laid on the beach when the tide is over.
  3. I wonder if this will set off a massive rise in the Yen this coming week. Thoughts?

  4. I sure hope so!!!
    :D :D :D
  5. so if yen skies our market tanks
  6. Interesting, The COT's show funds have not really covered their shorts yet:

    long short
    38,194 91,047

    and small specs are not all that long:

    long short
    52,373 41,756

    Looks like there is still plenty of squeeze left in the Yen IMO.
  7. Yes.

    There is no doubt about this.

    It is a mathematical certainty, easy to predict and determine as calculating the rate at which yen appreciation makes the yen carry trade a break-even, and then, more importantly, a money-losing exercise.
  8. So this then begs the question of the yen appreciating on Monday because of the news, and vis-a-vis, do our equity indicies follow.
  9. Over the last month or so, any appreciation in the yen versus the dollar has almost always triggered equity market weakness.

    I believe that the issues that matter now are those of sustained yen appreciation, and to what degree.

    I have read many articles whereby carry trade experts peg the magic threshold of yen/USD at something under 115 for the carry trade to unwind.
  10. #10     Mar 18, 2007