Wednesday, 9 February 2011

China's interest rates jump as Year of Rabbit hops in

China celebrated the start of the Year of the Rabbit by raising interest rates again.

On Tuesday, on the sixth day of the new lunar year and while China's stock markets were still closed for New Year celebrations, the People's Bank of China announced that it would raise both the one-year deposit and lending rates by 25 basis points to 3.0 percent and 6.06 percent respectively on Wednesday.

Chinese central bankers must somehow think that rate hikes add to festive cheer. The previous rate hike had occurred on Christmas Day.

The move by the PBC was not totally unexpected. Most major Asian stock markets open on Tuesday had declined yesterday even prior to the announcement. Central bank tightening in the region was no doubt among the chief concerns held by investors. The Japanese stock market was the notable exception.

Asian stock market performance on 8 Feb
 CloseChange% change
Nikkei 22510,636.0043.940.41
Hang Seng23,484.30-69.29-0.29
Sensex 3017,775.70-261.49-1.45

Japanese stocks may have been buoyed by positive economic reports on Tuesday. The Finance Ministry reported that Japan’s current account surplus widened 30.5 percent in December from a year earlier to 1.195 trillion yen. Exports accelerated, rising 14.0 percent in December from a year earlier compared to 9.3 percent in November.

Not all the economic data for Japan on Tuesday were positive though. The economy watchers survey by the Cabinet Office showed that the diffusion index for current conditions fell to 44.3 in January from 45.1 in December. However, the diffusion index for future conditions rose to 47.2 from 43.9 for the third straight monthly gain.

Later on Tuesday, developed markets in Europe and the United States were able to shrug off the Chinese rate hike. Most of the major US and European stock markets closed higher.

Western stock market performance on 8 Feb
 CloseChange% change
S&P 5001,324.575.520.42
FTSE 1006,091.3340.300.67
CAC 404,108.2717.470.43

In Europe, stocks not only shrugged off the Chinese rate hike but also disappointing economic data from Germany. Germany's Economy Ministry reported on Tuesday that industrial production fell 1.5 percent in December.

On the bright side, the Bank of France reported that its business sentiment Indicator in industry rose to 110 in January, the highest since October 2007, from 107 in December, while in the United Kingdom, the British Retail Consortium reported that sales at stores open at least 12 months rose 2.3 percent from a year earlier in January, the fastest pace in 10 months.

So on the whole, economies and markets appear relatively resilient. It looks like while the global monetary tightening cycle has begun, it will take action from one or more of the leading central banks, namely the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, before we see a more pronounced impact on the global economy and markets.

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