China goes up a quarter point interest rate to 5.56%
| Date: October 19, 2010 | Source: AlertNet |
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Loading ... China has moved tab in the currency war, even if it was with a modest rise in interest rates (0.25 points to 5.56%) . The increase represents an attempt by the Chinese authorities to control inflation and reorder their own economic growth. The move could weaken the dollar against the yuan and China decide to allow the favorable exchange rate between the dollar and the euro.
The Chinese central bank has raised rates for the first time in nearly three years, a move that has surprised the market, at least in the fact of having done so quickly, since, as noted by Marian Fernandez, head of strategy Inversis Bank "the tendency was suspected that it would produce, after having recorded the monetary aggregates and real estate prices over the schedule." After the surprise move could be some data on GDP and inflation will be announced this week that higher than expected.
The rate hike has been taken by surprise to the markets, which have reacted to the floor. The bags, oil and gold fell after the announcement by the Chinese central bank. At the same time, the dollar rose and acted as a refuge by the tightening of monetary policy of the Asian giant.
"Externally (is) a message clear to the international authorities on the relative stability of the yuan, "says a recent Citigroup report, adding that can accentuate the rise of the yuan. However, Citi also clarifies that the rate increase is too small to rise to great changes and disturbances. Among other things, debt sales are "light" and the situation remains "unchanged in the European country risk." Meanwhile, Marian Fernandez is skeptical about the yuan as the currency is tapped, "out of a free float."
By contrast, Alexis Ortega, managing partner of Finagentes says that "the yuan should be strengthened. This is a continuation of an ongoing process of "depreciation of the dollar, especially against the yuan." Thus, the Chinese authorities "accept" a weaker dollar against the yuan, but "decide" the exchange rate dollar / euro European currency, according to Ortega, it should not fall below $ 1.35.
"The medium-term passes a falling dollar and a cast of his fall between major currencies (euro, yuan, yen)," said Ortega. "The euro will have to bear the cost." With less intervention of the authorities, "the market more flexible is the euro". In addition, China has been buying European debt, according to the expert Finagentes, which would explain the improvement of the bonds of some countries such as Ireland, despite having suffered downgrades.
In this sense, the euro currency has been the most vulnerable among the major world currencies. In the current scenario of currency war, the EU has remained on the sidelines. As a result, the euro has appreciated against other currencies, causing a detrimental effect on exports from the Old Continent.
From recent months, China keeps its currency artificially low, encouraging exports and hurting the trade balance of countries like the U.S. and Japan have launched a counter protectionist passing through the devaluation of their currencies. Pressures on China resulted in small revaluation of its currency this summer, something judged as insufficient by the United States.
Control of inflation and growth reordering
But the rise in rates has an obvious interpretation in internal key. Although the Chinese authorities had declared their confidence in controlling inflation, the next data, which will be known on Thursday, may yield a figure higher than expected. In August, China's annual inflation was 3.5% and analysts expect an increase to 3.6% in September.
Meanwhile, China's GDP grew by 10.3% in the second quarter. Data for the third quarter, also published this week, may show signs of overheating of the economy that contribute to a rise in prices.
In this sense, the measure of the Chinese authorities would seek to "avoid asset bubbles," says Marian Fernandez. It would also be "adjusting their growth," so far focused on external demand, with a very positive trade balance result of a relatively low yuan. In this sense, the rise in interest rates is also aimed at domestic demand and should encourage the return of investors to the country.
