Chinese Rate Hike on Christmas Day

December 27, 2010

The People’s Bank of China implemented a second rate increase, lifting its key lending rate to 5.81% from 5.56% and 5.31% at the beginning of 4Q10.  The central bank deposit rate is now 2.75%, up from 2.5% and a cyclical low of 2.25%.  The action was announced on Christmas Day,a day when almost all market centers are closed.  The central bank’s surprise timing recalls a Japanese rate hike on December 25, 1989.  Chinese officials have been worried about replicating Japan’s history, yet in this action have established a parallel with Japan.  Like Japan in 1989, China has tightened to contain inflation and overheated bank lending.  Japan’s case also followed quickly on the heels of an earlier rate increase in November 1989.  The epilogue of Japan’s action has been twenty years of a disappointing economic performance.  Inflation never became a problem, but GDP has expanded only around 1% per annum.

  • Chinese equities fell almost 2% today.

In other weekend news, minutes from the last Bank of Japan Policy Board meetings revealed concern about the strong yen and the effects of quantitative easing in the United States.

  • Japanese corporate service prices edged up 0.1% on month and fell 1.1% on year in November after dropping 1.3% in the year to October.
  • Japanese construction orders dropped 5.3% in the year to November.
  • Housing starts were 6.8% greater in November than a year earlier, surpassing analyst expectations.
  • Auto output in November was down 6.7% compared to a year earlier.

Britain’s Hometrack house price index posted a larger on-year decline of 1.6% in December after a drop of 1.1% in the year to November.

Finnish consumer confidence weakened to 13.5 in December from 20.8 in November.  Business sentiment firmed a point to +7.

Czech consumer confidence improved 2.6 points to 92.8 in December.  Business sentiment also rose, climbing 3.2 points to 96.4.

Industrial production in Singapore rose 1.1% last month on top of a 1.8% advance in October.  From a year earlier, the increase was 38.9% in the latest month and 31.8% in January-November.

The euro is trading at $1.3142.  The yen is at JPY 83.00.  Oil is trading above $91, and gold is slightly above $1380 per ounce.  The 10-year Treasury yield is 3.40%.

The eastern seaboard of the United States has been clobbered by a blizzard, adding to the normally thin trading volume at this time of year.  Much of Europe continues to suffer through very wintry conditions.

Copyright Larry Greenberg 2010.  All rights reserved. No secondary distribution without express permission.



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