China's yuan hit a post-revaluation high on Monday, bonds sank and stocks
ended flat after the monetary tightening since authorities stepped up efforts to
cool the economy in April.
Investors and analysts were split over whether the 0.27 percentage point rise
in banks' one-year deposit and lending rates, announced late on Friday, might
allow authorities to start bringing their tightening campaign to a close.
"The pressure for further monetary tightening will weaken visibly after
Friday's rate hike announcement," Deutsche Bank said in a report, arguing that
only one more tightening step was likely for the rest of this year.
Many in the markets, however, said the surprise rate hikes showed the central
bank was more concerned about inflationary pressure and rapid money supply
growth than previously thought. It was the first time this year that deposit and
lending rates were raised simultaneously.
"We believe that China will raise rates one more time before end-2006 and
another three to four times in 2007, at 27 bps each," Morgan Stanley economist
Andy Xie wrote, adding that the economy would stay overheated "for the
foreseeable future."
"China's rate cycle may peak only in 2008."
The China Securities Journal, one of the most authoritative financial
newspapers in the state-run press, reported the potential moves by the People's
Bank of China in a front-page story on August 18.
The report said there was an urgent need to widen the trading band -- the
yuan is allowed to move 0.3 percent on either side of a daily mid-point set by
the central bank -- for a wide range of trade and economic reasons.
"China's trade surplus has hit record highs in the three consecutive months
to July, making the need to further expand the yuan trading band an urgent
matter," the paper said, citing an unnamed analyst.
China's trade surplus soared over 40 percent year-on-year to 14.61 billion
dollars in July, bringing the seven-month figure to 75.95 billion dollars, up
nearly 52 percent from the same period in 2005.
China's continually ballooning surplus is one of the biggest causes of trade
frictions with its trading partners.
The European Union, Japan and especially the United States claim that China's
weak currency gives Chinese exporters an unfair advantage and have repeatedly
called for Beijing to raise the value of the yuan.
The China Securities Journal added that "a wider trading band could also be
an effective way to ease the problem of excess liquidity".
"It could also curb speculative trading on the foreign exchange market," the
paper said.
The report comes at the end of a week that has seen the strongest
fluctuations in the yuan's trading band since it was introduced in July last
year when the government ended the currency's decade-long peg to the dollar.
The yuan ended at 7.9686 to the dollar in the over-the-counter market
Thursday, compared with close of 7.9885 the previous day.
It posted a record rise for a single day on both the over-the-counter and
exchange-traded market on Thursday.
YUAN HITS POST-REVALUATION HIGH
The foreign exchange market viewed the rate rises as a signal that Chinese
authorities were likely also to use currency appreciation to cool the economy.
The yuan hit 7.9640 against the dollar on Monday afternoon, the highest level
since it was revalued by 2.1 percent to 8.11 and depegged from the U.S. currency
in July 2005.
It subsequently fell back a little, closing at 7.9656 compared to Friday's
finish of 7.9745, but traders said further rises appeared inevitable in coming
days and weeks. Some are targeting the 7.90 area by the end of this year.
"Friday's interest rate hike was not big, but it nevertheless indicated the
central bank's determination to cool the economy," said a foreign exchange
dealer at a European bank.
"The market believes the rate hike will herald a quicker pace for yuan
appreciation in the medium term."
China's central bank may widen the yuan's trading band amid rising economic
pressures and as currency fluctuations approach the daily limit, state media
reports.
The China Securities Journal, one of the most authoritative
financial newspapers in the state-run press, reported the potential moves by the
People's Bank of China in a front-page story.
