China raises rates again, more to come

Saturday, 25 December 2010 23:00

BEIJING: China's central bank raised interest rates on Saturday, Dec 25 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 markets.

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 signaled 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.

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 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 October 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 mid-November.

Still, the specter 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 high-yielding 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

PDRM Announcement!

PDRM - ANNOUNCEMENT

Please be assured that the 50% discounts are still applicable after 15th Dec 2010.

Effective 1st December 2010, PDRM is offering an incentive on compound rates for all types of
traffic summons issued –

All summons issued on or before 30th November 2010 :
A rate reduction from the original compound
All summons issued after 30th November 2010 :
Summons settled within 15 days will be offered a 50% incentive from the original compound
Summons settled within 16 to 30 days will be offered a 30% incentive from the original compound
Unsettled summons within the 30 days ARE NOT entitle for an incentive and will be immediately black listed - from myeg web

Japanese investments to pour in soon

A NUMBER of fresh Japanese investments are expected to pour into Malaysia soon, covering several sectors.

Although no specific value was mentioned and to which sectors the potential investments would be made, Japanese Ambassador to Malaysia Masahiko Horie said the investments will help gear up Japan's position as the number one foreign investor in this country.

"The investments are coming soon (early 2011). I am, at the moment, busy preparing for them," Horie told Business Times in Kuala Lumpur yesterday.

Trade between Japan and Malaysia in 2009 was worth RM100 billion and Horie expects it to increase this year, backed by the improving economic environment.

Earlier, Horie was briefing reporters on the increasing interest of Japanese retirees in Malaysia for their second home under The Malaysia My Second Home.

He said Malaysia is at the top of the list among the 10 countries with 16.6 per cent, beating Hawaii, Australia, Thailand, New Zealand, Canada, the Philippines, Indonesia, Spain and the US.

"Malaysia has been at the top since 2006 and we expect it will continue to be that way at the moment," he said.

Horie said there are currently 1,500 Japanese retirees who opt for the second home programme in Malaysia and expects the figures to rise by 10 per cent this year.

"Out of the 400,000 Japanese nationals that visited Malaysia in 2009, a total of 160,000, or 40 per cent, came as tourists," he said.

He cited eight factors that contribute to the rising interest among Japanese in Malaysia which include climate, political and social stability, warm weather, distance and multi-racial society.

Horie said with AirAsia X flying to and from Japan and Malaysia beginning December 9 and Malaysia Airlines opening up flight routes directly to Haneda Airport which is much nearer to Tokyo than Narita Airport, human traffic between the two countries will rise. - www.btimes.com

Rail project: MMC, Gamuda, Govt to team up

Gamuda Bhd and MMC Corp, two Malaysian construction companies, may team up with the government to help build a passenger rail network in Kuala Lumpur, a Gamuda executive said.

Work on the project may start in July, Gamuda group managing director Lin Yun Ling told reporters in Shah Alam, near the capital. He didn’t elaborate.

The rail project is among the US$444 billion of private sector-led projects identified by the Malaysian government to spur investments and accelerate growth in Southeast Asia’s third-largest economy. Besides the rail network, the plan includes developing a nuclear energy industry and a shopping district to rival Singapore’s Orchard Road.

Shares of Gamuda, a construction and property group based in Petaling Jaya, outside the Malaysian capital, climbed 1.6 per cent to RM3.83 at 11:45 a.m. in Kuala Lumpur trading. MMC, a power and construction company based in Kuala Lumpur, slid as much as 1.1 per cent to RM2.79.

Gamuda and MMC, which proposed the mass-transit system, will likely be the master planners of the project if they offer the best pricing, Second Finance Minister Ahmad Husni Hanadzlah said Nov. 11.

Qatar, Vietnam

Prime Minister Najib Razak said in October the country will start on a mass rail project in the capital in early 2011, expected to attract RM40 billion (US$12.8 billion) in private-sector investment.

Azharuddin Nordin, general manager of the group managing director’s Office at MMC, wasn’t available to comment as he was in a meeting.

Gamuda also plans to bid for a mass rail network and other infrastructure project in Qatar, the host of soccer’s World Cup in 2022, Lin said. The company expects revenue of RM1 billion from its property business in the year ending July 31, 2011, he said.

Property sales may reach RM5 billion over the next two years, with projects in Vietnam contributing as much as RM3 billion, Lin said. -- Bloomberg