Tuesday, April 5, 2011
The Chinese monetary authorities have an amazing sense of timing when it comes to announcing major monetary policy changes. They announced a major interest rate hike today, the second this year, while the country is celebrating the ‘Tomb Sweeping Day.’ Not to make too much of the timing of today’s move, but this is not the first time that the People’s Bank of China (PBOC) has used a public holiday for this purpose.
China has been dealing with a major inflation problem, which at its most recent reading was running at 4.9%, above the central bank’s 4% target. The PBOC’s primary tool thus far has been adjustments to banking reserves, though they have started hiking the domestic lending and deposit rates as well. Today’s announcement increases the one-year Yuan-denominated lending rate by 25 basis points to 6.31%.
China’s status as a key growth engine for the global economy makes its inflation fights of utmost importance to the markets. A slowdown in Chinese growth as a result of its monetary tightening will have a direct bearing worldwide, particularly in commodity markets. I would be looking for softness in commodity prices and basic materials stocks today.
A host of other emerging markets are also battling inflationary pressures, prompting monetary authorities to initiate rate hikes. We have seen rate hikes in recent days from India, Taiwan, South Korea, Thailand and others.
In effect, the world has been divided into two broad camps: easy money and tight money. Pretty much all of the major emerging markets, including China, would fall in my over-simplified ‘tight money’ camp. The U.S. and Japan are in the other camp, while Europe appears to be undecided at this stage, but is leaning towards rate hikes. With bailout of Portugal now only a question of ‘when’ not ‘if’ an ECB rate hike will add to the pressures on Spain.
We have started seeing some discussion here in the U.S. about inflationary pressures as well, which I find quite amazing given where have been through in the recent past. It seems like only yesterday when all of us were concerned about a ‘Japan-like’ situation taking hold in the U.S.
It is a testament to the success of the Fed’s quantitative easing program that the discussion has evolved from deflation to inflation. Today’s release of the minutes of the last FOMC meeting will shed light on how the central bank looks at this discussion.
Sheraz Mian
Director of Research
Zacks Investment Research
