While the eurozone is transfixed on the unfolding problems in Ireland and other peripheral economies, ‘central bank action month‘ continues in Asia, where China is galvanising its Asian neighbours — even more than usual — first with its ongoing stock market rout and also moves to introduce price curbs on consumer goods.
Now, reports in the state media have triggered speculation that China may shortly move to raise interest rates for a second time.
The Chinese government could raise interest rates for a second time this year on Friday, the official China Securities Journal said. The forecast was contained in a report on rising inflationary pressure and appeared based in part on the idea that the government has been known to announce such policy moves after China’s capital markets close for the weekend.
The report… gave no indication of the source of its information. It was bylined “Zhong Zheng”, meaning ‘China Securities Journal,’ implying that it represents the newspaper itself rather than any one journalist. It noted the Bank of Korea’s rate hike on Tuesday and rising domestic price pressures. “We will see a window for a rate hike opportunity on 19th because the central bank usually picks a date around the 20th or a Friday to raise interest rates so analysts believe the 19th is a window for a rate hike,” it said.
South Korea indeed on Tuesday became the latest Asian country to lift rates, though in this case the hike was the second one since June.
As the FT reports, the Bank of Korea raised rates by 25bps to 2.5 per cent as it signalled it was becoming more concerned with inflation than the strong won – and will probably rely on impending capital controls to cool a carry trade that it has blamed for won volatility.
Inflation exceeded Seoul’s target last month, rising 4.1% year on year against 3.6% in September.
As for China’s price controls, China’s main economic planning body, the National Development and Reform Commission, has said it is working on a package of price controls and other measures in efforts to curb inflation after consumer prices rose sharply in October.
The FT notes that the commission is drawing up measures to limit food inflation — even as several key cities in the country have launched efforts to cap food prices. Consumer price inflation rose to 4.4% in October, well above Beijing’s 3% target, after food prices increased at an annualised rate of 10.1% over the month.
For China’s often over-zealous population of stock market investors, meanwhile, inflation fears are nearly as much of a deterrent to investment as the prospect of price controls, judging by this week’s stock market rout in Chinese markets. As the Wall Street Journal noted on Wednesday:
China’s benchmark Shanghai Composite Index has dropped 8% over the past three trading days, including a 4% swoon on Tuesday, as investors fear that the government is ramping up measures to fight price rises in the booming economy. The Shanghai index closed at 2894.54. The retreat has reversed what had been a four-month bull market in which China’s stocks rose 33%.
It’s also raised the likelihood that China’s stock markets will end the year in the red despite an underlying economy that’s expected to expand at close to 10% this year. The Shanghai Composite is now down 11.67% year to date.
Indeed, as Bloomberg notes, it has all been enough to even turn Nomura “bearish” on Chinese stocks. On top of that, China’s investment agency CICC advised investors to stay away from equities after after Premier Wen Jiabao’s Tuesday announcement that China was drafting measures to contain inflation.
As to where Beijing’s price-control efforts may lead, Capital Economics seems to have one of the most sensible takes, saying in a note:
Price controls may appeal to officials eager to be seen to be doing something about rising inflation, but China’s experience with controls has not been encouraging. For markets, they could play either way. Investors may conclude that such a step makes conventional monetary tightening less urgent. More likely, the need to resort to such a step would fan fears that the government was going all-out to tame inflation.
Related links:
Stephen Green (video) inflation exaggeration? - China RealTime
Lessons from guess-who, for guess-where - FTAlphaville
Asian central banks – Lex
China’s little problem with unspent cash – FTAlphaville