China announced on Christmas Day that it’s raising its interest rates for the second time in two months, in efforts to slow its economy and ward off inflation. It was another .25% increase, raising the one-year yuan loan rate to 5.8%.
Over the past year China has tried restricting loans, particularly for real estate development and speculative investing, and raised reserve requirements on its banks six times. Those efforts had very limited success.
While the U.S. Fed, which counts only core inflation (with the cost of food and energy removed) claims that U.S. inflation is too low, running around 1% a year, China’s inflation rate rose to an annualized rate of 5.1% in November, and is expected to rise further in December and January.
Analysts believe that with yesterday’s second rate hike in just over two months China’s central bank is in the early stages of a more serious formal monetary tightening cycle, with more interest rate hikes ahead until it succeeds in bringing its threatening inflation under control.
Global markets have been nervous going into weekends recently, expecting China might choose a weekend to make such an announcement. It may have been even more clever, waiting until the Christmas weekend in the west, when even less attention is being paid than on a normal weekend.
Stock markets don’t like rising interest rates or rising inflation, certainly not both at the same time. That’s no doubt a major reason that China’s stock market rolled over into another bear market last year, in spite of its surging economy that had Wall Street touting China as the place for investors to be.
The Shanghai Index plunged 30% from its high in November, 2009 to its low in July of this year.
And now, after surging up from that July low it has rolled over again, on renewed concerns about its still rising inflation, and the latest indications that China is moving to more serious monetary tightening to slow its economy and attempt to bring that inflation under control.
The concerns in mainland China’s markets have also been having an effect on the Hong Kong market, which we have been warning subscribers about for several months.
The open financial market system of Chinese city-state Hong Kong is becoming more closely tied to the financial interests of mainland China.
For instance, China has been experiencing considerable success in its efforts, announced earlier this year, to have its currency more widely accepted as an international currency. The Wall Street Journal reports that since June China has made currency swap agreements with eight countries, with many now able to invoice and settle international trades in yuan.
Hong Kong introduced a technology change that allows more use of electronic settlements in transactions that use the yuan. And last week the Hong Kong Monetary Authority said yuan deposits in Hong Kong had surged to 42.1 billion yuan by the end of November.
The Journal quotes a specialist on China at the Cato Institute as saying, “Nobody would have predicted this 10 years ago. And it is the tip of the iceberg.”
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