China's Rate Raise & Its Massive Implication Worldwide
As China raises rates, don't forget the yuan
Late Chinese leader Mao Zedong is seen on a 100 yuan (15 USD) banknote in this photo illustration taken in Beijing December 9, 2010.
Credit: Reuters/Petar Kujundzic
BEIJING |
(Reuters) - China was Grinch-like in raising interest rates on Christmas Day, but in fact investors have good reasons to be grateful.
The government provided much-needed reassurance that it was determined to rein in price pressures -- and a salutary reminder that more yuan appreciation than the market expects could be in the offing.
The key take-away from the rate increase, China's second in just over two months, is that Beijing is softly, softly pulling every tightening lever within its reach.
"The central bank will only raise rates in small and steady increments in the coming months," said E Yongjian, an analyst at Bank of Communications in Shanghai.
"The yuan will also steadily climb next year, serving as one tool to alleviate the inflationary pressure," he said.
Ba Shusong, an economist with the Development Research Center, a think-tank under the cabinet, provided a neat summary of the government's strategy for taming consumer prices, which rose 5.1 percent in the year to November, a 28-month high.
"The rhythm of policies will become regular, something we call the simultaneous implementation of the three rates: banks' required reserve ratios, interest rates and the exchange rate," he said in comments published in the Economic Information Daily, a Chinese-language newspaper, on Monday.
Even as a move on Christmas Day was a surprise, the 25-basis point increase in benchmark one-year interest rates announced on Saturday was in line with a majority view in a Reuters poll earlier this month. Most economists had predicted that China would raise rates by the end of this year and the consensus was for two more increases in the first half of 2011.
Normally apprehensive of tightening, investors had begun to worry about the opposite in China -- that the government was delaying the inevitable for too long and that the ultimate reckoning with inflation would be more painful as a result.
"As long as tightening is not too much lagged behind the curve, market sentiment should improve gradually in the first half of 2011," Shen Minggao, an economist with Citigroup, said in a research note.
APPRECIATION NOW?
Shen echoed Ba in saying that faster yuan appreciation would play a bigger role in the campaign against inflation.
That view has been notable by its absence in financial markets of late. Investors are pricing in just a 2.4 percent rise in the yuan versus the dollar over the next year, according to offshore forwards. In 2007-08, when China was last battling inflation, the government let the currency climb more than 7 percent in six months.
Although price pressures are less serious now, it would not be surprising to see a mini burst of yuan appreciation in the coming months.
In fact, an informal poll of onshore currency dealers over the last week, showed many of them expect the yuan to gain roughly 6 percent over the next year, hitting 6.25 per dollar by the end of 2011.
BEIJING — Authorities in Beijing have hiked the minimum wage in the capital by about 20 percent for the second time in six months amid soaring food costs, rising property prices and China's widening wealth gap.
The minimum monthly salary in the city will be increased to 1,160 yuan from 960 yuan on January 1, according to a statement posted on the government's website Tuesday.
In July, Beijing increased the minimum wage by 20 percent to 960 yuan.
China launched a round of minimum wage hikes this year after a spate of labour disputes and a string of employee suicides highlighted growing discontent among the country's millions of low-paid workers.
This latest increase in the nation's capital comes amid growing official and consumer anxiety over rising inflation, which topped five percent in November for the first time in more than two years.
Food costs soared nearly 12 percent year-on-year last month while property prices continued to rise, defying government efforts to cool the red-hot real estate market.
Ever-fearful of inflation's historical potential to spark unrest in China, top leaders have been pulling on a number of policy levers to rein in consumer prices and tame runaway house prices.
On Saturday, the central bank hiked interest rates for the second time in less than three months after ordering lenders to keep more money in reserve, effectively limiting the amount of funds they can lend.
Premier Wen Jiabao went on national radio at the weekend to reassure listeners that the government would be able to tackle inflation and house prices that have risen out of the reach of many ordinary Chinese.
Wen said Sunday he understood that recent price rises had "actually made life even more difficult for people on low and medium incomes".
But he stressed that thanks to government intervention, "we are fully able to control the general level of prices" and said he was confident that housing prices would come back down to a "reasonable level".
BEIJING (AP) — China's high-profile feuds with the United States, along with territorial spats with Southeast Asian neighbors and Japan, showed a more muscular foreign policy in 2010 that called into question Beijing's promise of a "peaceful rise."
China's leaders bristled against outside pressure like never before, but they now seem to be dialing back that combativeness. Beijing is working to ease tensions with the United States ahead of a high-profile visit by the president to Washington next month, and is working to maintain steady economic growth and reassure the region that it is a constructive player.
A more aggressive China could still emerge, but the country's leaders — wary of taking risks and obsessed with economic growth — don't appear prepared for that just yet.
"Beijing is tactically adjusting to a disastrous diplomatic year," said Michael Green, a top Asia adviser during the George W. Bush administration.
While Beijing has feuded with countries from South Korea to Norway, its ties with Washington — considered China's most important foreign relationship — have been especially troubled over the past year.
The United States and China have deeply intertwined interests, but Washington also regularly criticizes Beijing's massive trade surplus, its human rights record at home and economic policies that U.S. lawmakers say cost American jobs.
Early this year, the sides sparred over a $6.4 billion U.S. weapons sale to China's rival Taiwan, President Barack Obama's meeting with exiled Tibetan leader the Dalai Lama — reviled for what Beijing says is a drive for the Himalayan region's independence — and Google's decision to stop censoring its search results in China.
China froze military-to-military contacts with the United States in response to the Taiwan arms sales, although those ties are now improving. Beijing will host U.S. Defense Secretary Robert Gates next month for a long-delayed visit.
Also in January, Chinese President Hu Jintao will be feted in Washington by Obama — replete with a state dinner he was denied during the Bush administration.
In the longer term, China must deal with more active U.S. diplomacy in Asia, a sharp contrast with what some believe was a Bush-era neglect of the region. Beijing expressed particular annoyance over Washington's courtship of Southeast Asian nations, such as Vietnam — and Secretary of State Hillary Clinton's assertion that the U.S. has a stake in the countries' territorial disputes with Beijing.
Beijing, in contrast, has seen ties in the region deteriorate in recent months.
When a South Korean warship was torpedoed in March, killing 46 sailors, China refused to endorse the findings of an international panel that blamed longtime Chinese ally North Korea. Just weeks later, China hosted North Korean leader Kim Jong Il, alarming citizens in the South.
Nor did China criticize the North after it shelled a South Korean island in November, killing four and sending tensions on the Korean peninsula soaring.
As a result, Seoul, whose biggest trading partner is China, proceeded to ignore Beijing's calls for restraint, staging massive military drills, and its suggestion of emergency nuclear consultations with the North.
Ties with traditional rival Japan also hit their roughest patch in five years over the detention of a Chinese fishing boat captain accused of ramming a Japanese patrol boat. Beijing appalled Tokyo by demanding compensation and an apology even after winning the captain's release.
Public opinion surveys in South Korea and Japan have registered levels of worry about China's military not seen in years.
Farther afield, Beijing unleashed a flood of invective and froze some contacts with Norway following the Nobel Committee's decision there to award its Peace Prize to imprisoned Chinese dissident writer Liu Xiaobo.
Then, just before Christmas, China parried with the Vatican over the right to appoint bishops, ending an unspoken arrangement that had largely kept the peace between the sides for the past five years.
Can China turn things around in 2011 and blunt impressions that the government is throwing its weight around?
Officials continue, at least, to pay lip service to the promised peaceful rise — a slogan meant to allay concerns that China would follow the familiar rising powers that come into conflict with the established powers. China's leadership has also judged that avoiding friction with other countries is the best way to keep the economy humming.
"Peaceful development is the only right path. The more developed China is, the more it needs to strengthen cooperation with the rest of the world and the more it needs a peaceful and stable international environment," China's top diplomat, state counselor Dai Bingguo, wrote in a year-end commentary.
As it tries to make good on that promise, look for more efforts from Beijing to boost "soft power," including perhaps continuing the expansion of its state media's overseas presence and pouring more resources into Confucius Institutes to teach Chinese language and culture. A milder tone in the state-controlled media would also be an indication that Beijing wants to smooth things over.
China is also expected to increase its participation in United Nations peacekeeping missions and Gulf of Aden anti-piracy patrols as a way to ease worries over rising Chinese military capabilities.
Yet the pressure of a domestic audience that seeks a harder line may be hard to resist.
Officers in the People's Liberation Army have grown more outspoken in their criticism of the West and Japan, sentiments that dovetail with rising nationalism. China's weathering of the global financial crisis has also boosted the government's willingness to demand a greater voice in international institutions. China eclipsed Japan this year as the world's second biggest economy after three decades of blistering growth that put overtaking the United States within reach.
The restiveness of minority areas in Tibet and Xinjiang and a looming leadership transition also push leaders toward hardline positions.
And for decades to come, Chinese will continue to cast their country's rise as a struggle for pre-eminence with Washington.
"The U.S. will never allow China to challenge its leadership and will try to 'contain' China's rise," analysts Zheng Jie and Zhong Feiteng wrote in a regional security report for the Chinese Academy of Social Sciences released this week.
China Yuan Up Late On Heavy Demand; PBOC Sets Fixing Lower Again
Vs Parity Pvs USD/CNY Central Parity 6.6247 6.6252 USD/CNY OTC 0830 GMT 6.6212 -0.05% 6.6248 High 6.6258 +0.02% Low 6.6205 -0.06% SHANGHAI (Dow Jones)--China's yuan was higher against the U.S. dollar late Wednesday on heavy demand after the People's Bank of China set the dollar-yuan central parity rate lower for the seventh consecutive session.
But strong dollar demand from state-owned banks, likely at the instruction of the central bank, limited the yuan's gains intraday, traders said.
The yuan will likely continue to appreciate in the last two sessions of the year, with the dollar possibly testing the psychologically important level of CNY6.6000, they said.
On the over-the-counter market, the dollar was at CNY6.6212 around 0830 GMT, below Tuesday's close of CNY6.6248. It traded between CNY6.6205 and CNY6.6258.
The People's Bank of China set the dollar-yuan central parity rate at 6.6247, down from 6.6252 Tuesday and approaching the record low of 6.6239 set Nov. 12.
"The central bank is sending a signal that the yuan appreciation will continue," said a Shanghai-based trader at a European bank.
At 6.6212 to a dollar, the yuan has appreciated 3.1% since June 19, when China pledged to increase yuan trading flexibility and effectively ended a two-year peg to the dollar.
Large state-run banks were active buyers of the dollar in the afternoon, providing support to the U.S. unit, said a Guangzhou-based trader at a European bank.
"Without a doubt, the central bank is signaling a yuan appreciation trend through the fixing, but it doesn't want the yuan to appreciate too much intraday," he said.
Offshore, one-year dollar-yuan nondeliverable forwards fell to 6.4750/6.4790 from 6.4860/6.4910 late Tuesday.
China PBOC To Sell CNY1 Bln 3-Month Bills Thursday
SHANGHAI (Dow Jones)--China's central bank said Wednesday it plans to sell CNY1 billion (US$151 million) worth of three-month bills in its regular open-market operation Thursday.
The People's Bank of China carries out regular open-market operations Tuesdays and Thursdays. It sold CNY1 billion worth of one-year bills in its Tuesday operation.
If the PBOC doesn't offer any repurchase agreements Thursday, it will inject a net CNY35 billion into the money market this week, as CNY37 billion worth of bills and repos mature.
The central bank injected a net CNY26 billion into the money market last week through its open-market operations.
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