Greater inflation pressure and worsening negative interest rate are the direct causes for the interest rate rise, which also conforms to the changes of the market interest rate.
Right when the Qingming Festival is coming to an end, the central bank exercises its muscles again to increase the interest rate, raising the base interest rate for deposit and loan in RMB by 0.25 percentage points.
“Growing pressure of inflation and worsening negative interest rate are the direct causes for the interest rate rise,” said Lian Ping, chief economist from Bank of Communications. He added that, taking into consideration such factors like rising costs of factors, rising prices of produces, imported inflation and liquidity surplus, China is facing growing pressure of inflation.
“It is estimated that in March, CPI may rise by more than 5%. Since the second quarter of this year saw the carryover effects of prices above 2.5 percentage points, and they might hit 4 percentage points, it is possible that CPI is going to exceed 6% in May or June.”
The Quarterly on the Prospect of China’s Macro-economy, published by the Institute of International Finance under Bank of China, holds that the political turmoil in the Middle East and North Africa, which are called “the oil tank of the world”, is certain to threat the global oil supply and its security. This, combined with the international capital which cashes on in this opportunity by making the price of crude oil skyrocket in the global market, increases the imported inflation estimation of China.
With the rising prices and worsening “negative interest rate”, it is hard for residents to retain the value of their savings, which may lead to the outflow of savings from the banking system, increasing the inflation pressure.
“To raise the interest rate is conducive to the management of the estimated inflation, is an embodiment of the sound and steady currency policies implemented by the Central Bank, and also its decision to highlight the position of a steady price level in the macro financial control,” said Lian.
On the other hand, the Central Bank used to apply various quantitative instruments such as deposit reserve ratio, and the drop in the quantity of capital has endogenously incurred rises in its value.
“Due to the growing interest rate in the market, it is more difficult for banks to attract deposits. Some of them even give depositors cash, presents and preferential services to raise the interest rate covertly. Under these circumstances, raising the rate is an answer to the call of the changing interest rates in the market, and is helpful for eliminating the lousy allotment of resources and disorderly competition when there is
regulation on the interest rate,” said Guo Tianyong, director of the Research Center of Chinese Banking at Central University of Finance and Economics.
A relatively sound economic growth lays foundation for the rate rise, and the changing flow of cross-border capital provides it with good conditions.
A relatively sound economic growth lays a basis for interest rise. Our economy has stepped out of the rapid recovery which was made possible by the stimulation of favorable policies, and into a phase of steady growth. In 2010, it grew by 10.3%, obviously higher than the potential economic growth rate of about 9%.
“Despite that the growth rate will possibly slow down a little in the first quarter of this year, China’s economic growth will be standing above 9% all around the year,” said Lian Ping.
The changes in the flow of crossborder capitals have provided the interest rate rise with favorable conditions. Since the fourth quarter last year, with the accelerated recovery of American economy and the reduction in its trade deficit, and the growing inflation in emerging markets, the global capitals are likely to flow back into America.“It is predicted that this is going to last during the first half of the year, which will make the interest rate rise less attractive for the ‘hot money’,” analyzed Guo Tianyong.
Though the market generally estimated a rise of interest rate in April, it is still a little surprising to really have the rise come true before economic statistics in March including CPI are issued.
According to Lian Ping, usually the market has its analysis and estimation after the statistics come out, and then comes to an expectation of interest rate rise. This time, the rise comes in advance and unexpectedly, making it actual and contributing to lessening the influences of the currency policy on the market so that the market will not fluctuate excessively.
Experts believe the room for more rises is limited with one more probable rise this year.
This is the second this year for the Central Bank to raise the rate, and the fourth since last year. What people care is whether there will be more rises in the future.
“The room for more rises of the interest rate is limited,” said Lian Ping,“After the rate rise, the base interest rate for one-year deposit is 3.25%. Even if it increases to 3.5%, it will not exert much influence on the economy. But if it reaches 4% and the loan interest rate gets 7%, the interest rate in the market will grow to be much higher than that, considering the scarcity of loan resources. When this happens, the enterprises will have to pay more for financing.”
Li added, until the first half of 2010, the balance of loans for the local financing platform stood at about 7,660 billion yuan. A big rise of the interest rate will put the borrowers under more pressure to repay the debts. At the same time, as developers find it hard to secure capitals right now, financing is extremely expensive. Big rises will place small and medium developers into dire straits.
Lian Ping thought that to analyze the potentiality for interest rate rises, it is best to compare the current situation with that of 2007. “In 2007, our economy grew at a rate as high as 14.3%, CPI was above 8% at peak, housing prices were skyrocketing, and the stock market set a record of 6124. By contrast, for the time being, the whole economy is working steadily, with every index lower than when they were in 2007. And that year, the base interest rate for one-year deposit reached 4.14% at peak, so how high can the rate be compared with that?”
“We predict that there may be another rise this year, in the second quarter or at the end of the year when America is about to raise theirs.”
Some investors believe the rise will not change the fact that the stock market will rise above the threshold of 3,000. And some also think there will be much pressure for the stock market.
In March, the Shanghai securities composite index rose several times to touch 3,000, but failed every time. On the last trading year before the holiday, the two stock markets were enjoying a strong momentum, with Shanghai composite index approaching 3,000 again. What kind of influence on the stock markets will the rate rise have at this time?
It is held by some investors that, considering the latest two rate rises, which definitely influenced the markets temporarily, but did not change the tempo of the markets. The psychological influence of rate rises on the market has declined.
Viewing from the overall tendency of the market, the focus of the indexes has moved upward. The hotspots of the market are also shifting from small cap stocks and theme stocks to weight stocks. If real estate, steel, coal and other weight stocks can continue their momentum, the rate rise will not hinder the stock market from catching up with 3,000.
While, pessimists think that the rise comes before the economic statistics of March being issued represents a heavy pressure of inflation. If the inflation should turn out to be higher than what we expect, the regulation will also exceed what we expect accordingly, which will undoubtedly bring tremendous pressure to the stock market.
From another aspect, the influence of successive rises on the operation of listed companies has been more and more evident. According to Liu Xianjun, analyst from China Securities Co., Ltd., under the dual function of the rate rise and the appreciation of RMB, the domestic preliminary manufacturing industry is facing a pressure that should not be ignored.
Recently, PMI index has bounced back a little, but whether it will not fall again remains to be observed. The soaring inventory of listed companies which have issued their yearly report from another respect reflects the internal pressure in the current economy. Therefore, in the future, when applying the tool of rate rise, we should consider these factors to avoid excessive regulation.
Fei Xiaoping, researcher from Dongguan Securities, said that the current inflation pressure results mainly from the carryover factors and imported inflation. And it will probably be alleviated a little in the second half of the year. For the moment, the value of the market is being underestimated. And the evaluation of the market requires recovering to a reasonable level.
The capital resources are limited, but the overall liquidity is favorable. The main question of the market is the lack of confidence. If blue chips can maintain its momentum and charge forward, the composite index will still have chance to break through the threshold of 3,000. However, one should not be too optimistic about the height it can reach, Fei added.