Analysis & Feature
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Monday, December 27, 2010
CHINA RAISES RATES AGAIN, MORE TO COME C
hina's central bank raised interest rates on Saturday for the second time in just over two months, underscoring concerns that inflation may be entrenched and swift action is needed to get price pressures under control. The intensification of policy tightening also reflects the government's belief that the economy is fundamentally in a good shape. Below are some implications what the latest move means for monetary policy outlook and financial mar-
But investors were not sure if the People's Bank of China (PBOC) would move this year given it only just raised banks' reserve requirements on Nov 19, ahead of data which showed inflation at a 28-month high of 5.1 percent. The PBOC's Christmas Day rate rise is characteristic of its tendency to surprise investors with policy changes when they least expect it. The move came amid tentative signs that price pressures were spreading
Interest rates are just one item in China's toolkit for mopping up the liquidity that is at the root of the country's inflation problem. Banks' reserve requirements and lending quotas are crude but effective shovels for removing cash from the economy as well.
kets. CHRISTMAS SURPRISE The rate rise shows China's top leaders have the task of taming inflation at the top of their agenda, as they had signalled in November, when they said they would intervene to control prices if needed. Such language, alongside Beijing's official switch of its monetary policy to "prudent" from the previous "moderately loose" in early December, had laid market expectations for tighter policy.
beyond food and inflation and could be more stubborn than authorities had expected. China's real interest rates are deep in negative territory. The one-year benchmark deposit rate is only 2.75 percent after the latest climb, well below November's inflation of 5.1 percent, highlighting the risk that price expectations may spin out of control. All said, there have also been dovish signals from the government in recent days. Notably, it has raised its 2011 inflation target to 4
percent from this year's 3 percent. RATE RISE CYCLE Though announced by the central bank, the decision will have received approval from the highest echelons of power. Once a consensus has been forged in Beijing to raise or cut rates, past experience shows that moves often come in bunches. This is the second rate rise in the current tightening cycle (the first was announced on Oct. 19) and analysts think that another 50 bps of increases are on the way over the next year. The PBOC made clear on Friday that it will deploy a range of policy tools to head
off inflationary pressures and asset bubbles. Interest rates are just one item in China's toolkit for mopping up the liquidity that is at the root of the country's inflation problem. Banks' reserve requirements and lending quotas are crude but effective shovels for removing cash from the economy as well. So far, the PBOC has dragged its feet on jacking up rates, relying mainly on quantitative tightening measures, notably banks' reserve requirement ratio (RRR) and lending restrictions, which are less likely to dampen growth in the economy.
The PBOC has increased RRR six times this year but only lifted interest rates twice. Some analysts thought China should have raised rates earlier in the year when the country was growing at a double-digit annual pace. But officials were worried at the time about sluggish external demand and uncertain about how the domestic economy would cope when government stimulus was withdrawn. The view from Beijing now is that the economy has built up a momentum solid enough of its own and tightening is needed to keep it on a sustainable path of growth.
LIMITED MARKET IMPACT Since the move was relatively mild, there could be a relief rally when the Chinese stock market opens on Monday. After all, the market had already priced in more rate rises, with the main index in Shanghai down nearly 10 percent since midNovember. Still, the spectre of more tightening will hang over the market, limiting any gains. The government is determined to keep inflation under control, indicating there will be more tightening in the coming year. The rate rise may suggest
that the central bank is less concerned about hot money inflows, and is more willing to let the yuan appreciate at a faster pace and use the currency as another lever to rein in inflation. In global markets, tighter Chinese policy could fuel investor concerns that growth in the world's second-biggest economy may falter, undermining stocks, commodities and highyielding currencies. But many analysts say China's resilient economy can withstand higher rates and they are a good thing for the country in the long run as they prevent the economy from overheating. -Reuters
Economy, not politics, is worry for Iranians W
ith Iranians f e e l i n g choked by foreign sanctions, broken promises and money worries, President Mahmoud Ahmadinejad faces as much pressure on the economic front as from politics. Ahmadinejad has cut fuel and food subsidies to save $100 billion on the state budget and to make Iran less vulnerable to any sanctions on fuel imports. Critics say he risks stoking inflation and consumer unrest. For many ordinary Iranians, the economy is their main headache. They are not concerned whether the Islamic Republic is covertly building nuclear bombs, as the United States and its allies fear. International sanctions and the government's elimination of subsidies have led to a general fear that life will get worse. The United States imposed new sanctions on Iran on Tuesday to increase pressure on Tehran over its nuclear programme, which the Islamic state says is only for peaceful purposes. "People are worried about the economic sit-
uation. You can not care about politics when you are worried about not being able to pay your rent," said Farokh Amiri, a political science teacher. Analysts say that despite public disgust with the economy, the revival of anti-government unrest was unlike-
"In the absence of coherent opposition leadership, mobilising unrest is almost impossible," political science teacher Samad Hojjati said. Students, merchants and clerics, who played a major role in mobilising unrest to topple the U.S.-backed shah in
made any opposition very costly," he said. Thousands of people protesting against the conduct of the election were arrested after the vote. Most have since been released, though more than 80 people have received jail sentences of up to 16 years. Two people who were
l Analysts say subsidies unlikely to cause unrest
l Say opposition lacks coherent leadership l Firing foreign minister sign of intolerance
ly as the opposition leaders no longer had the power to inspire people. The 2009 disputed reelection of Ahmadinejad plunged the world's fifth biggest oil exporter into its biggest internal crisis since the 1979 Islamic revolution and exposed a deepening rift among the ruling elite.
1979, have been either paralysed or sidelined since the vote, which the opposition says was rigged. The establishment has neutralised its opponents and stamped out any expression of dissent, a senior western diplomat in Tehran said. "Those who took into streets will think twice. The government has
put on trial after the election have been executed. PLAYING ROBIN HOOD "He played a very dangerous gamble to regain his legitimacy and popularity among Iranian grassroots...that is why he acts like a Robin Hood" said analyst Hojjati, referring to the monthly cash com-
pensation of $40 per person which the government pays to the needy. "Ahmadinejad needs lower-income Iranians' vote to secure a 2012 parliamentary election victory." But frustration is simmering in the nation. Prices of most consumer goods have risen and many middle and lower-class Iranians already struggle to make ends meet. "The monthly amount of $40 does not even
take care of the electricity bill after the subsidy cut. How can I manage with a meagre salary of $500, when prices are rising," said school teacher Hamid Maleki, 46, a father of three. Thousands of Iranian truck drivers began strikes after an increase in the price of diesel fuel, opposition websites reported. Courting confrontation both at home and abroad, Ahmadinejad also played a risky game by sacking his
foreign minister Manouchehr Mottaki. He was a close ally of parliament speaker Ali Larijani, a critic of Ahmadinejad's policies. Appointing Ali Akbar Salehi, an aide who heads the Iranian Atomic Energy Organisation, as acting Foreign Minister despite his lack of diplomatic expertise had a clear but indirect message, a former official said. "Ahmadinejad dislikes criticism. Only
like-minded people can have positions at his cabinet," he told Reuters on condition of anonymity. Ahmadinejad's close aides have outraged many conservatives, including MPs, because of their "unorthodox" comments. "Many lawmakers respect Salehi, who stands a good chance of overcoming the barrier of parliament's required confidence vote for the post," the former official said. -Reuters