Tag Archives: People’s Central Bank of China

China Hikes Interest Rates Another Notch

As expected, China’s central bank has raised its benchmark interest rates before the end of the year. Its one-year lending rate goes up by a quarter of a percentage point to 5.81% from 5.56%, effective Dec. 26th. The corresponding deposit rate rises to 2.75% from 2.50%. It is the second rate rise in as many months and another turn of the screw in the fight against inflation. We expect to see more rate rises in 2011 to push up the price of credit as well as more quantitative measures to reduce its supply. Yesterday, Hu Xiaolian, a deputy governor at the People’s Bank of China told a meeting of bankers that China “should maintain a reasonable and moderate credit growth next year that is in line with the country’s goal in economic development and inflation control”.

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China’s Exchange Rate Policy Switch Not All It May Seem

We have long argued that China would allow its currency to appreciate, as much of the rest of the world is demanding and which in the long-term is in its own economic interest, but that it would do so at a time of its own choosing. That indeed has been Beijing’s public position regardless of the volume of the rhetoric coming out of Washington and Brussels. Today’s unexpected announcement by the People’s Central Bank of China that it will return to its pre-financial crisis managed floating exchange rate regime introduced in 2005 to replace the yuan’s peg to the dollar but suspended in July 2008 following the onset of the global financial crisis, is more style than substance, though there is some substance there.

No one should think, though, that Beijing is letting the currency float freely. The central bank is explicit that there will be no ‘large-scale appreciation of the yuan” and that the previously used narrow bands within which the currency can move will be re-instituted. That means that any appreciation in the exchange rate is likely to be modest and gradual. And while the announcement comes ahead of the G20 summit in Toronto, with the intention, we assume, of taking some of the sting out of the issue there, there is no indication of the timetable by which it will be implemented. We don’t expect the central bank to be in much of a rush. Nor do we think that all China’s economic policymakers are yet convinced of the solidity of global economic recovery that allowing the yuan to appreciate would imply and which the central bank cites as a justification for the policy switch.

There is also an opaque reference in the central bank’s statement that “continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies”. While no one has known exactly what the composition of the reference basket was, beyond being overwhelmingly U.S. dollars, given the changing nature of China’s trade over the past couple of years, the new mix could have a material effect on the politically sensitive U.S. dollar-yuan rate that would mean that rate not moving much, and the yuan-euro rate moving more, a combination that wouldn’t appease the increasingly bellicose critics of China in the U.S. Congress. If the euro remains weak, the yuan could conceivably depreciate against the dollar, which would really put the cat among the pigeons.

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