October 20,2010

PBoC Rate Hike: RMB Appreciation Will Continue

By Qing Wang, Beijing

PBoC announced Tuesday that both base deposit and lending interest rates are raised by 25bps: While interest rates on demand deposits are kept unchanged, those on time deposits of two years or longer maturity are raised by 46-60bps.

 

Our views:

 

1)This is a surprise to us and the market consensus.

 

2)This suggests that 3Q GDP growth in 3Q and September CPI inflation-to be released this Thursday-may have also surprised to the upside.

 

3)This rate hike's key purpose is to manage inflation expectations, including property prices, with a view to easing the impact of negative real interest rates . It also reflects the authorities' confidence in the underlying strength of the economy.

 

4)This surprise move is unlikely to represent the beginning of a rate hike cycle in China. The outlook for G3 economies is still uncertain; we note zero interest rate policies and potential further quantitative easing at major central banks, Plus, Chinese economic growth is troughing in 3Q, Thus we think Chinese authorities will likely be very cautious in initiating a rate hike cycle at this juncture.

 

Impact on our calls:

 

1)No additional rate hike through year end;

 

2)Bank lending target will unlikely be relaxed to be significantly beyond the original target of Rmb7.5tn for this year;

 

3)Renminbi appreciation against the USD to continue; our year-end targets for USD/CNY are unchanged at 6.60 by end-2010 and 6.20 by end-2011;

 

4)We do not expect a significant CPI inflation increase beyond its level in September;

 

5)This rate hike is unlikely to have a meaningful negative impact on growth momentum, in our view.

 

(Qing Wang is a China Chief Economist of Morgan Stanley)

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