Tuesday, January 12, 2010

China raises the interest rate

China has raised the credit reserve ratio by 50 basis points, which will lead be sucking out CNY 300 billion or $50 billion from the market. The new rates will be 16% for big banks and 14% for small banks.
Indiacation about the rate hike was imminent when China sold bills for the first time in nine months at higher rates. Bills worth $8.8 billion were sold at 1.3684%, four basis points higher than previous. Although the rise was small, it did provided the signal of the direction in which China central bank will move.
Impact will be negative intially but more of sentimental than anything else. Base metals will be primarily be impacted in commodities front, as the Chinese are the one who are playing a major role in pricing of base metals. Well maintianing 10% growth rate is no mean achivement, to maintain that they have become the largest consumer of virtually all metals and energy products(India is still the largest consumer of GOLD, but i doubt till what time we can maintain that as GFMS has already predicted that China will overtake India).
But looking at other side, i think raising the rates signifies the confidence in the economic front and the belief that economy will be able to sustain without the loose economic policy.
When we look at the stimulus package by China which was $586 billion, the squeezing is miniscule around 1.5%.
The important question is will it have any impact on dollar. I think it should be positive as rise in rate will have negative impact on other currencies such as Australian dollar, Brazilian real and other currencies of those country who have large Chinese investment. As Chinese banks will be less inclined to lend due to higher reserve requirment, thus lower investment in these countries. Dollar will strenthen due to weakness in other currencies.

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