The People's Bank of China's interest-rate hike, which took effect on August 19, has not produced a big bang as the one in October 2004 did.
Why not? The 2004 interest-rate increase was the first since China's entry into the World Trade Organization (WTO) in late 2001 and also the very first after the domestic financial market became highly market-orientated. Furthermore, the 2004 hike directly impacted the people who borrowed loans from banks to buy housing. All this combined to raise the media's and people's concerns about the interest-rate rise.
This time, however, the increase came at a time when the market has become more mature and the central bank has put in place a policy of preferential interest rates for housing buyers.
But the most talked about issue is whether or not the latest interest-rate rise would boost pressure on the renminbi to appreciate.
The generally accepted theory dictates that an interest-rate hike automatically pushes up the value of the currency. By this theory, the current interest-rate rise would raise the expectations of investors and, in turn, encourage overseas capital to flood into China, betting on the renminbi's revaluation. This kind of capital, as expected by investors, could reap profits from the renminbi's interest hike as well as from its appreciation. Moreover, the investors would be able to profit by having access to the domestic stock and real estate markets and the markets of resources-based products, killing three birds with one stone.
Garnering such fat profits, however, is conditioned on a number of factors. First, the renminbi and foreign currencies must be freely convertible into one another. Second, the return rate on the international financial market must remain lower than the margin in which the renminbi is revaluated. Third, the domestic capital market must boom while barriers to market access are non-existent.
None of these preconditions have currently been met.
To begin with, the renminbi does not enjoy free convertibility at present, though international investors are craning their necks for the appreciation of the Chinese currency, which constitutes a kind of pressure for revaluation.
