People’s Bank of China

July 6, 2011

The Chinese one-year lending and deposit rates have been lifted for the fifth time since October 19, 2010.  Each increase amounted to 25 basis points.  From cyclical lows maintained December 2008 until October 2010 of 5.31% and 2.25%, respectively, the key central bank rates have now climbed back 125 basis points to 6.56% and 3.50%.  The last cyclical peaks in 2008 until the first of five cuts between September and December of that year were at 7.47% and 4.14%.  The new current rate levels are marginally above the mid-point between the 2009 cyclical lows and prior cyclical highs.  The People’s Bank of China has also lifted reserve requirements a dozen times since February 2010, six times last year and six times so far in 2011.  Their most recent increases were done on May 12 and June 14, each by 50 basis points.  The reserve ratio now stands at 21.5%. 

All of this tightening has helped cool China’s economy.  The composite purchasing managers index in June of 51.6 was a 27-month low and down from 52.8 in May and 55.2 at the end of 2010.  By tightening monetary policy in spite of slower growth, officials underscored the primacy of inflation containment.  The market reaction to this latest interest rate increase was nonetheless muted because, unlike earlier tightening moves, investors believe that today’s action represents the last step before a pause.  Sentiment had not been so inclined in the case of previous squeezes of monetary policy.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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