Stocks dip after rate rise in China

Global stocks fell last week following a rate rise by the People’s Bank of China.

Stocks in Asia and Europe lost value following the central bank’s increase of China’s benchmark one-year lending rate from 5.58% to 5.85%. Mining stocks, which are key beneficiaries of China’s economic boom, were hit particularly hard.

Opinion is divided on whether the move was a surprise. Judging from the market reaction, it was unexpected. But experts say there were signs that such a move was imminent.

Nicholas Lardy, a China expert at the Institute for International Economics in Washington DC, says: “I don’t think this is a surprise.”

He points out that an enormous increase in lending in the first quarter, along with strong GDP and investment growth figures, signalled such a move was likely.

Julian Jessop, chief international economist at Capital Economics in London, takes a similar view. He writes that: “Some form of tightening was widely expected after the strong first-quarter GDP data.” (Asian Economics Update, April 27, 2006).

However, there is widespread agreement that the importance of the move is mainly symbolic. A quarter-point rate rise is unlikely to make much difference to an economy growing at more than 10% a year. But it signals that the Chinese authorities are willing to take action to stop the economy from overheating.

John Ip, senior economist at Morley, says: “This is clearly the first of many other avenues they can use. The importance is that there is more to come.”

Lombard Street Research argues that China’s move towards tightening is not sufficient to stop an economic “hard landing”.

Diana Choyleva, a director of the consultancy, writes: “Unfortunately, it is too late to restrain the local authorities’ investment craze. Private sector profitability has already been destroyed, while the likely US consumer-led slowdown late in 2006 will take the last support from underneath China’s expansion.” (World Service Daily Note, April 27, 2006).

Others takes a more optimistic view. Ip says that the authorities have ample resources to bolster the economy if a hard landing looks imminent.