China: Rate Rise Surprise

China has lifted interest rates a third time this year and for a 5th time in the last eight months.

The move came last night in something of a surprise and could possibly indicate that the June inflation rate, due out a week tomorrow may be bad, as high as 6% annual or more.

The rate rise had been tipped this weekend after the country's central bank issued a statement earlier this week underlining its current monetary policy stance (see below).

The People's Bank of China hiked lending and deposit rates by 0.25% will bring the benchmark one-year lending rate to 6.56% and the one-year deposit rate to 3.5% .

The rate rise applies from today.

The news came after the close of stockmarkets across Asia but sent European markets lower.

Asian markets had closed mixed to lower on worries about Chinese Banks after a Moody's warning on debt and the sale by Singapore Government wealth fund, Temasek of part of its stakes in the Bank of China and China Construction Bank.

The sale and fears about a possible rise this weekend saw the Chinese market end down 0.2% and Hong Kong finish off 1%.

The Temasek sale happened within hours of the Moody's statement, and its downgrading of Portugal's credit rating to junk status.

The central bank has already lifted the reserve requirement ratio for banks six times this year.

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Inflation data for June will be released on July 15 and many economists forecast it will hit a new high above 6%.

The CPI rose by 5.5% in May from the previous year, setting a 34-month high and well above the government's yearly inflation ceiling of 4%.

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Some Beijing reports said the CPI could hit a peak of 6.2% in the next month or so before falling over the rest of 2011.

The rate hikes and increases in the reserve ratio have already seen bank lending fall sharply, industrial production ease and manufacturing slow to a two year low, according to the HSBC-Markit and the Government's own survey which were released last week.

China's gross domestic product growth could fall below 9% in the third quarter, Xinhua news agency reported yesterday.

Xinhua cited Song Li, deputy director of the National Development and Reform Commission's economic research institute, as the source of the statement.

China's GDP rose 9.7% from a year earlier in the first quarter, down marginally from the 9.8% growth in the fourth quarter of 2010.

Earlier this week, a short statement on the website of the Chinese central bank on Monday raised speculation of an imminent rate rise.

A number of Chinese newspapers said the statement could see a rate rise this weekend (but one has been tipped for three of the past five weekends).

Why a rate rise would come ahead of the coming release of June quarter and June monthly economic data is a bit odd, although other media reports on Monday and Tuesday suggested annual inflation could hit 6% or more in June. That would be enough in some analysts thinking to see another rate rise sooner than later.

In its statement on Monday, the PBOC reiterated that it will continue with its "prudent" monetary policy.

Although the economy is headed towards the government-set macro control target, the country still faces a complicated economic and financial situation, with fragile global recovery and other uncertainties, said an online statement summarising the latest quarterly meeting of the PBOC's monetary policy committee.

The government will work to make the monetary policy more stable, targeted and flexible. It will also employ multiple monetary tools to check liquidity and keep the money supply at a reasonable level, the statement said.

Efforts should be made to optimize the country's credit structure and increase loan support to both key and weak sectors, especially in the agricultural sector and middle and small-sized enterprises, the statement said.

The government will further improve the formation mechanism of the Yuan exchange rate and keep it basically stable at a proper and balanced level, it added.

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