China’s surprise rate hike triggers selling in stocks and commodities

Apparently following through on promises to control liquidity and property speculation in the Chinese economy, China’s central bank raised interest rates on three-month bonds. The move surprised financial markets and various commodities and Chinese stocks promptly sold off on the news. However, disagreement exists over whether this move is a special action in response to a recent surge in reserves or whether this is the start of a protracted fight against inflation. From Reuters:

“The move, which was accompanied by the biggest weekly net drain from money markets in 11 weeks, prompted concerns that the central bank could be getting ready to use more forceful measures to cool growth and fight inflation, such as raising benchmark lending rates…

…analysts said the move should be seen more as an effort by the People’s Bank of China (PBOC) to even out the flow of liquidity into the system, in particular to press banks not to repeat the start-of-the-year rush to lend that marked 2009.”

Reuters also quotes a skeptical Robert Rennie, chief strategist for Asia at Westpac Banking Corp in Singapore:

“Over the past eight months, the PBOC’s assets, or its reserves, have risen by around 1.6 trillion yuan ($234 billion) while its liabilities — bills, bonds, repurchase agreements and reserve requirements — were roughly unchanged…So the fact that the PBOC has drained 137 billion yuan and raised rates by 4.04 bps suggests they are moving to withdraw some of this very rapid rise in liquidity…But it is very hard to describe this as a tightening in my view.”

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