China’s stocks fell yesterday, erasing earlier gains, on speculation the Chinese central bank will accelerate increases in interest rates after boosting borrowing costs over the weekend. Bonds dropped and yuan forwards climbed.
The benchmark Shanghai Composite Index declined 1.9 percent yesterday to 2,781.40 at the close, the lowest since Oct. 8. Commodity and consumer companies ranging from Aluminum Corp of China Ltd (中國鋁業) to Kweichow Moutai Co (貴州茅台酒) slid more than 2 percent on concern that monetary tightening will slow economic growth.
Chinese currency forwards rose to a five-month high on prospects the government will allow further currency gains to contain consumer prices that reached a 28-month high last month.
PHOTO: REUTERS
“Investors were initially relieved as this interest-rate increase has been priced into stocks for a long time,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “However, they’re now thinking about the future; that one increase won’t be enough to bring inflation under control and more rate hikes will be needed. That’ll keep depressing valuations of stocks.”
The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Saturday in its second move since mid-October. The benchmark lending rate rose to 5.81 percent, compared with 7.47 percent before cuts from late 2008 to counter the global financial crisis. The deposit rate increased to 2.75 percent, compared with the 5.1 percent annual pace of inflation last month, the highest in 28 months.
Chinese Premier Wen Jiabao’s (溫家寶) government aims to limit asset bubbles in the real estate market and prevent rising prices from leading to social unrest after flooding the economy with cash from late 2008 to drive a recovery.
China’s monetary tightening next year might be mainly in the first half, JPMorgan Chase & Co and Morgan Stanley said. China may raise rates as many as three times in the first half of next year, according to Morgan Stanley, while JPMorgan forecasts two increases in that period.
Metal producers paced declines in Shanghai. Aluminum Corp of China and Zhuzhou Smelter Group Co (株州冶鍊集團), the nation’s biggest producers of aluminum and zinc, slid more than 2 percent, while Kweichow Moutai, a liquor maker, and GD Midea Holding Co, a manufacturer of home appliances, dropped more than 3 percent.
The central bank raised rates for the first time since 2007 in October and ordered lenders to set aside more money as reserves for the third time in five weeks on Dec. 10.
Chinese new bank loans have fallen for two straight months, to 564 billion yuan (US$85 billion) at the end of last month, from 596 billion yuan in September, government figures show. The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and reached a three-year high of 5.67 percent on Thursday.
The cash crunch contributed to a 15 percent decline in the Shanghai Composite this year, the biggest drop among the world’s 15 largest equity markets, including a 2 percent loss last week.
Twelve-month non-deliverable yuan forwards strengthened 0.4 percent to 6.4765 per US dollar as of 3:34pm in Hong Kong, reflecting bets the currency will strengthen 2.4 percent in one year, according to data compiled by Bloomberg. The contracts touched 6.4740, the highest level since Nov. 23.
The yield on the 3.77 percent note due December 2020 climbed seven basis points to 3.88 percent, while the price of the security dropped 0.57 per 100 yuan face amount to 99.10, according to the China Interbank Bond Market.
“Investors are worried about the times of interest rate hikes next year after the earlier-than-expected rate increase,” said Yang Yongguang, a bond trader at Sealand Securities Co in Shenzhen. “The 10-year bond yield won’t rise much because banks have a strong demand for bond assets at the beginning of the year.”
The rate increase “is more a signaling tool than anything else,” Yu Song (宋玉) and Helen Qiao (喬虹), analysts at Goldman Sachs Group Inc, wrote in a report on Saturday.
“We still expect the government to take a combination of measures to control inflation, including further rate hikes and possibly slightly faster currency appreciation, and believe the heavy lifting of controlling inflation will still fall on quantitative measures,” they wrote.
Wen said measures to curb the country’s property market weren’t well implemented and reiterated his goal for home prices to return to a “reasonable level” during his term that ends in 2012.
The Chinese government will also increase the supply of affordable housing and introduce more measures to curb speculation, he said on national radio on Sunday.
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