China raises interest rates

China suddenly raised its interest rates yesterday. The announcement was made at around 7pm in China time. So, there was no influence on Chinese stock markets in 19 October.

China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects its concern about rising domestic asset prices and stubborn inflation.

It said it would raise benchmark one-year deposit and lending rates by 25 basis points each.

Oil prices fell, stocks pared their gains in Europe and the dollar rose across the board after the announcement as investors were caught off guard by the tightening step.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

A number of leading economists, including some advisers to the central bank, have suggested the central bank increase deposit rates to keep savers' returns in positive territory.

China reported consumer inflation of 3.5 percent in the year to August and economists expect that the pace climbed to 3.6 percent in September.

Still, the increase in rates is surprising given that several top leaders have recently expressed confidence that inflation is under control, and have said that higher rates would potentially suck in speculative capital from abroad.

"They did it now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

China is due to report third-quarter GDP and a suite of economic data for September on Thursday. Economists polled by Reuters expect that economic growth slowed to 9.5 percent year on year last quarter, down from 10.3 percent in the second quarter.

As the article reports, stock prices plunged all over the world while the dollar and bond markets surged. It's because investors feared Chinese economy cooling down and flocked to safe havens. Look at the charts below.

Flight to safety. That's the word heard in the markets in 19 October. But the impact of interest rates rise looks like limited and short-lived. Chinese stock markets gained a little bit today, though real estates lost.

China's benchmark stock index rose to a six-month high on speculation the nation's first interest- rate increase since 2007 will help tame inflation and contain asset bubbles.

China Life Insurance Co. and Ping An Insurance (Group) Co. rose more than 4 percent after Mirae Asset Securities said insurers will outperform in a rising rate environment. Liquor maker Kweichow Moutai Co. and Tsingtao Brewery Co. led gains among consumer stocks that are less dependent on the economy. China Vanke Co. and Poly Real Estate Group Co. slumped at least 6 percent as higher borrowing costs may deter demand for housing.

The rise in interest rates makes me wonder whether China lets the yuan appreciate. The yuan should rise if the spread of interest rates shrink, though China's currency depreciated today. People say that the fear of inflation compelled China to raise interest rates. But I don't think it's the whole reason. G20, delayed currency report, and the US midterm election. There is much left to be explained on China's sudden action.