Higher Rates In China: What You Need To Know
Editor’s Note:
This week’s guest commentary is from Don Straszheim of Straszheim Global
Advisors, Inc. Last week’s move by China’s central bank is the subject.
Brice
China’s central bank, the People’s Bank of China (PBoC)
raised
its benchmark lending and deposit rates by 27 basis points at the 1-year
level. Here is what is most important:
Symbolic tightening. This
small rate rise is more important symbolically as an economic reform
step — modernizing their economic management system — than
it is as a monetary policy tightening move. They surprised us all. There were no outward signals of
this hike coming. China has years to go before it has a coherent monetary policy, but this step is
good news not bad news.
Greater overheating concern. China’s
concerns about overheating are greater than recent official statements had indicated. This is a reversal of
their position — more concern, not less.
Slower Growth Outlook. This
step indicates a greater concern about overheating than before. We
expect further administrative steps to back up this rate hike
announcement. Our expectation for growth is down a bit, from the 9% range, to maybe 7-8% in 2005.
In terms of real economic growth, China is likely to remain the standout growth economy in the
world. While this slowdown step, we believe, will only marginally slow growth, Asia is more vulnerable
than is the rest of the world.
Being careful.
China will remain careful not to slow things too much. They want ‘slower, not
slow.’
From a macro-management perspective, jobs are even more important
in China to the Chinese than they are in America to the Americans.
A Series of hikes. China
likely will raise rates a couple of additional times until slower growth is more clearly established. A good target for one
year out — rates are up one full percentage point.
Commodity markets. Commodity
markets are likely to remain under pressure until investors’ nervousness
on how much China’s economy slows abates. But China’s long-term
growth prospects remain bright. We see no reason to be especially bearish on
the longer-term outlook for the commodity markets and the demand coming from China.
Rate rise delayed. Part
of China’s delay in raising rates has been to protect the financial situation
of their state-owned enterprises which will now be
faced with higher borrowing costs.
Currency effect. When
the dust settles, we do not expect a major, lasting effect on the currency
markets. This is not in our opinion a precursor to any near-term
revaluation of the currency. We expect the peg to remain into 2005 at 8.28 Chinese Yuan to the dollar.
Administrative steps still key. China’s
banks still do not operate like banks. They are lending arms of the government. Administrative steps will remain
most important in managing China’s economy.
The longer term. This
step should be regarded as a longer-term plus — just one more step down the
path of trying to create a market economy with all the appropriate
tools, levers and features. Nothing is more important to China’s economic future than fashioning
a modern monetary policy and financial system.
(310) 820-1112
Donald H. Straszheim x223
don@straszheim.com
Leon Lin x231
leon@straszheim.com
Johnny Wan x225
© 2004 Straszheim Global Advisors. This report is for private circulation and
distribution only. Although the information herein has been obtained from sources
believed to be reliable, we do not guarantee its accuracy, completeness, or
fairness. Opinions and estimates may be changed or withdrawn without notice.
Straszheim Global Advisors are not brokers or investment advisers, and they
do not provide investment advice or recommendations. The information contained
in this report should under no circumstances be considered as investment advice
or recommendations for the buying or selling of any security or commodity.
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