Economic Policy News
- Markets shrug off rate rise
Date: 21-Mar-2007 Sources: (Shenzhen Daily)
CHINA'S financial markets took an interest rate rise in their stride over the past two days as investors were confident that the 0.27 percentage points rise in benchmark lending and deposit rates announced Saturday would do little to reduce the money flooding into the markets.
Stocks surged, the yuan hit a high against the dollar, and bill and bond yields rose moderately Monday.
Yesterday, the Component Index on the Shenzhen Stock Exchange closed at 8,294.62 points, up 17.82 points from the previous close. The benchmark Composite Index on the Shanghai Stock Exchange closed at 3,032.20 points, up 17.76 points.
However, economists polled by Reuters forecast another rate rise this year and expected other tightening measures.
The Shanghai Composite Index tumbled 2.64 percent in the opening minutes Monday, jangling nerves after the 9 percent plunge on Feb. 27, which was sparked by rumors of measures to crack down on speculation.
But it rebounded to close 2.87 percent higher at 3,014.442 as newly created mutual funds saw the early drop as a chance to increase their holdings, while bank shares soared on hopes that the rate hike would end up widening lending margins slightly.
The index's rise left it up 160 percent from the start of last year and near its record intra-day high of 3,049 hit last month, it ended down 9 percent.
In the foreign exchange market, the central bank surprised traders by setting the yuan's daily mid-point against the dollar at 7.7351, its strongest since China revalued the currency in July 2005.
Previously, the bank had typically kept the yuan stable after monetary tightening to deter speculation. Some saw the stronger mid-point as a sign the authorities were prepared to see faster yuan appreciation to cool the economy.
Most money market and bond yields, which had already been climbing in response to the central bank's signals, rose only about 2 to 6 basis points (bps) Monday.
But the government bond market saw a dramatic widening of the one- to 10-year yield spread to 113 bps from Friday's 106 bps.
This suggested some investors believed inflation might rise substantially this year - and that further steepening of the yield curve could take long-term yields to levels where they begin to undermine flows of money into equities.
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