Even as global markets are panicked with the clues from China that it is going to raise its benchmark interest rate, China has announced an increase in the required reserve ratio (RRR) by 50 basis points to 18.5 percent. This is the second raise in two weeks by the Chinese government. With China’s October inflation at a 25-month high of 4.4 percent, China is poised to reduce the money supply in the economy.
However, markets seem somewhat relieved as the increase has not been as aggressive as expected. Actually, it is expected that China would increase its benchmark interest rate to curb rising inflation. Markets around the world have been bullish for a week on such expectations. Even China’s Shanghai index has dropped by ten percent in the last six trading sessions, of which eight percent has come in only the last three trading days. The Shanghai index lost four percent on November 17.
Global markets also fared badly last week on Chinese tightening fears. India’s Sensex dropped by 3.56%, the third weekly drop in a row. Though it is said that Indian stock markets are in correction mode, the big fall in the last three days was mainly attributable to fears of China’s tightening moves. Britain’s FTSE 100 lost 1.51 percent in the week ending November 19. However, Germany’s DAX, France’s CAC, and the US’s Dow Jones managed to pare losses on the final day of the week.
Though interest has not been hiked, market analysts are of the view that China is going to do so in the near future. China hiked its bank rate for the first time in three years after the financial crisis in October. It is expected that China would increase its interest rate two to four times by the end of the next year as per a Reuters report.
Chinese authorities are of the firm view that inflation has to be contained to prevent a property bubble. Emerging market economies are also worried that the US’s QE2 move to pump $600 billion into the economy will push up prices of their exports and their countries will be flooded with hot money, raising inflationary concerns.
China’s increase of the RRR by 50 basis points will absorb at least 350 billion yuan, or nearly $53 billion. China’s lending spree in 2009 has also contributed considerably to the heating up of the Chinese economy. Now China is likely to allow appreciation of the yuan versus the dollar, a long-pending demand in the western countries, mainly the US, as its trade deficit with China is going up month by month.
China’s inflation rate is expected to reach five percent in November while its target rate is three percent. So, China will continue to pursue its tightening measures in the coming months.Powered by Sidelines