The central bank's renewed efforts to curb the inflow of
speculative capital into the stock market are expected to create
volatility in the short term, investment experts said.
The People's Bank of China announced a series of monetary and
exchange rate policies on Friday amid worries the mainland stocks
are surging to dangerous new highs.
The central bank raised banks' reserve ratio by 0.5 percentage
point to 11.5 percent, effective June 5. It also raised the
one-year deposit rates by 27 basis points and lending rates by 18
basis points.
The daily interbank trading band of the renminbi exchange rate
against the US dollar is widened from 0.3 percent to 0.5 percent
from today.
Economists and analysts, however, said the measures are too mild
to cool down the market, which is flush with liquidity.
But they are expected to have a negative impact on market
sentiment.
"We don't view any of these announcements as a significant
policy adjustment. The first two are simply the latest in a long
line of gradual moves aimed at keeping liquidity and real interest
rates stable," said Jonathan Anderson, chief economist of UBS
Asia.
"The current hike could also be seen as an attempt to send a
mild message to the domestic equity market to cool down," he
added.
"We expect the stock market to fall next week and if it proves
resistant, Beijing could continue with many more follow-up moves,"
said Stephen Green, senior economist of Standard Chartered.
Chen Weiran at Guotai Jun'an Securities said the upward trend
will continue in the near future, accompanied by great price
volatility.
"The widening of the renminbi trading band is expected to raise
investors' expectations of currency appreciation, which will
attract inflows of capital," he said, adding that the interest rate
hike will have a negative impact on banking and real estate
stocks.
The hike follows comments from Zhou Xiaochuan, governor of the
central bank, who reportedly said last Thursday that the government
will consider using monetary policy and other instruments to
maintain economic stability.
The government has also taken a series of measures to curb
heated stock trading before the interest rate hike.
The China Securities Regulatory Commission recently renewed
warnings to new investors about the high risks in the market and
strengthened checks on irregular trading.
The China Banking Regulatory Commission eased restrictions on
qualified domestic institutional investors, allowing commercial
banks to invest in overseas stocks.
(China Daily May 21, 2007)