Translation by Andrew Vanburen from a Chinese-language piece in SinaFinance
THE BENCHMARK Shanghai Composite Index rose for five consecutive sessions in the waning days of the Year of the Tiger, allowing most analysts to predict that the mini-Tiger run would continue into the current Year of the Rabbit.
However, despite the nearly 5% rise in the index over these past five trading days, the 0.25% interest rate hike effective today will certainly take away much of the recent exuberance – irrational or otherwise – to the new Lunar Year.
Late yesterday, the People’s Bank of China – the country’s central bank – announced it would once again implement an increase in its key lending and deposit rates to help nip inflation in the bud.
This follows similar increases in both December and October of last year after a three year hiatus in hikes, and is primarily in reaction to rising food prices on the back of the continued robust economic expansion.
China’s fourth quarter GDP rose a staggering 9.8% year-on-year while the rest of the world’s top 10 economies are still mired in the low single digits.
However, the rate hikes in China – the world’s second biggest economy – was brushed aside by markets in the world’s biggest economy.
Shares in New York rose for the seventh straight day despite the news from Beijing.
But analysts don’t expect China’s stock markets to overlook the newly-tightened credit in the country so easily.
Over the past 11 years, the first trading day after the long Spring Festival holiday in the PRC has seen the Chinese stock markets rise seven times, with the year 2000 having a banner trading day – a 9.1% single day surge.
But that back-to-business trading day over a decade ago did not have to contend with another rate hike just as the weeklong holiday drew to a close.
“Banks aren’t particularly worried about incremental and reasonable rate hikes from the central bank. What concerns them most is the quality of borrowing after the hikes, and new hesitation in new project development, and that the lending and borrowing rates fluctuate in a relatively tandem fashion,” said an analyst at Wantong Securities.
Another market watcher says the timing of the new hikes was very telling.
“The central bank obviously used the very end of the Chinese New Year holiday – the biggest spending splurge week of the year – to send a strong message that it was time to tighten credit, and consumers’ belts, as managing inflation was still a critical concern for economic regulators. That being said, the central bank had no interest in ruining the holidays for cash strapped consumers with higher interest rates at the beginning of the holiday period.”
Therefore, analysts expect the momentum from the last five trading days of the Year of the Tiger during which the benchmark Shanghai Composite Index rose nearly 5% to lock horns with the newly increased interest rates, and therefore trading today and for the rest of this week will certainly be less bullish than originally anticipated a mere 24 hours ago.
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