Stock markets in China dropped less than 2 percent on Friday, while most Asian financial markets reacted with surprising calm to the People's Bank of China's announcement late Thursday of its first increase in interest rates in nine years.
The bank acted on Thursday to slow economic growth and try to curtail inflation, and its slight increase in rates, and the possibility of further moves, are likely to start trimming growth in China's imports.
Asian economies have become heavily reliant on trade with China for growth, economists and analysts say. Yet in the first day of trading after the Chinese rate increase, stocks dropped by less than half of a percent in Hong Kong, and by three-quarters of a percent in Japan, while rising modestly in Taiwan, South Korea, Malaysia, Australia and the Philippines, five big trading partners of China.
The mild response had several roots, experts said. Some kind of rate increase had been expected for many months, though the timing of the decision was a surprise.
China began tightening economic policy last spring when it imposed stringent administrative controls on the volume of bank loans and the issuance of zoning and environmental impact approvals. That package of measures caused Chinese stock markets to lose a quarter of their value last April and hurt commodity prices around the world on an expectation of slowing Chinese demand.
But recently, those measures seemed to have lost some of their effectiveness. Instead of being an additional tightening move, Thursday's rate increase may in effect partly replace the April measures.
"This is a switch of tactics, but it is not the start of a tightening cycle the way a Fed increase marks the start of a tightening cycle in the United States," said Donald Hanna, the chief Asian economist at Citigroup.
As it increased rates Thursday, the People's Bank of China also removed the ceiling it had long imposed on the interest rates that banks may charge. That caused the handful of Chinese bank stocks -- most of the industry is state-owned -- to rise on Friday, and fostered hopes among investors that Beijing is deepening its commitment to a free-market economy, which could help growth and stocks alike in the long term.
One immediate benefit from the rate increase was a drop in world commodity prices, from oil to copper. On Friday, however, oil, which rose above US$55 a barrel earlier this week, closed up US$0.84, at US$51.76. Higher inventories in the US were also helping to hold oil below its high of the week. Oil, in particular, has been a big worry for stock market investors across East Asia, where most countries have scant reserves.
Many macroeconomic models suggest that when a country becomes the biggest buyer of a commodity, a position that China now holds in goods from cement to steel, its domestic economic policies, including taxes and interest rates, can be used to push prices up or down, to its own benefit or detriment.
China's low interest rates and breakneck growth have caused it to buy so much of so many commodities lately that it has driven their prices steeply higher, forcing Chinese companies to pay top dollar to their own detriment and to the benefit of exporters elsewhere. Thursday's rate increase could wind up indirectly saving money at companies across Asia that are now bearing the burden of high prices for imported raw materials.
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