The slowing economy may control inflation said Premier Wen Jiabao hence China may limit interest rate rises in the next few months. Weak manufacturing and export demand and a consumer price of over 6% in June are additional factors. Beginning today, 1-year lending and deposit rates were given a .25-point boost and may be this year’s last said JPMorgan Chase & Co, HSBC Holding Plc and Bank of America Merrill Lynch. Another move for this quarter is seen by Nomura Holdings Inc.
At 10:11 a.m., Shanghai Composite Index dipped 0.3% while 12-month non-deliverable yuan forwards were steady at 6.3910/dollar (1.2% premium over spot rate). High pork prices caused food costs to increase 12% in May. Foreseen inflation acceleration may be curbed by the higher rates but slower economy and good year-earlier assessment may reduce 2nd half price gains. The People’s Bank of China said rates will increase on 1-year lending by 6.56% and on 1-year deposit by 3.5%. Deposit rates are steady. Capital Economics Ltd said benchmark rates are low based on economic growth and see gains for lenders’ reserve requirements. BofA said increases may continue in 2012.
June manufacturing was on its 28-month low. Purchasing managers’ index reported slow movements in export and output. The weak demand caused the fall yesterday of stocks commodities following the move of the central bank and Portugal’s debt rating’s reduction to junk by Moody’s. China’s increase begins when the European Central Bank raises benchmark rates to 1.5%. Other emerging markets have already raised rates. South Korea, India, Chile, Brazil and Poland did so in the past month. India’s repurchase rate is 7.5%. The U.S. Federal Reserve has no immediate action to lift its benchmark from near zero.
Premier Wen said China may not meet a full-year inflation target of 4% after the first 5 months’ 5.2% rate but said it can be kept below 5% after their efforts. Economic threats include credit squeeze for small companies and the fear of bad loans after record lending that helped in the post global financial crisis recovery. End of 2010 liabilities were at 10.7 trillion yuan ($1.7 trillion). S&P reduced China’s property developers’ outlook to negative due to possible slow sales and lower prices. June inflation was at 6.2% while consumer prices increased 5.5% in May. Investor George Soros said China’s economy is in a bit of a bubble after the delay in curbing inflation but Wen said the overall price level is within a controllable range and is expected to drop steadily.
Officials also increased banks’ reserve requirements. Mortgages and home purchases were restricted. Yuan was permitted to gain versus the dollar. Companies that may have to manage inflation in China include Yum! Brands Inc – the KFC fast-food chain operator in China. Analyst Wang Tao said a hard landing is improbable for China with its May economy’s momentum gain. There’s the 13% rise in industrial production, too and fixed-asset investment increase. There are plans of building millions of cheap homes that may help growth. World Bank sees a China GDP 9.3% increase this year against India’s 8%, 2.6% for the U.S. and euro region’s 1.7%.