Interest rise to cool property sector(b)

Byzjx

Updated 2004-11-01

 The rate rise indicates the central government's determination to cap speculation in the property sector and excessive growth in order to lead the economy develop in a sustainable development path.

But it by no means implies the government would impose an austere policy, economists said.

"The rate rise does not mean the government will change its goal on macro adjustments," said Jun Ma, chief China economist for Deutsche Bank.

"We believe the goal of growth rate is still between 8 and 9 per cent and inflation 3 to 4 per cent. The difference the rate rise brought is that the government is now using a better instrument to achieve its goal."

 While raising interest rates, the central bank also gave commercial banks more freedom in setting their own interest rates, a significant liberalizing move.

The central bank say for long time it will make the renminbi's exchange rate more flexible.

So it was just natural that the interest rate rise has led to guesses as to the implications on foreign exchange policy.

 However, most economists say they do not see the interest rate move as a prelude to forex policy changes.

 "We do not interpret the rate hike as a signal of an imminent change to the fixed exchange rate regime," said the Morgan Stanley report.

    The rate hike is only consistent with catching up with the 75-basis-point interest rate increase in the United States under the pegged regime, and does not necessarily lead to more inflows into renminbi, it said.

    "In fact, reduced speculation on asset prices amid tighter liquidity conditions could help ease appreciation pressure on the currency."

    Deutsche Bank's Ma said the overwhelming short-term goal for the government is economic stability.

    Interest rates are a more convenient tool than exchange rates for this purpose.

    A stable economic environment will be conducive for the preparation of a more flexible forex policy, he said.

 The move by the central bank is also seen by economists as a shift to greater use of market-based measures instead of administrative ones.

    Before interest rates rose last week, steps taken by the government in rectifying unhealthy measures include banning new investments in certain sectors and imposing tougher rules for converting farmland into industrial use, as well as repeated increases of the required reserves for commercial banks.

    The administrative measures, which proved to be effective to some extent, hurt small and medium-sized companies and private businesses more than they did State companies because the large companies and State companies have more resources to circumvent the restrictive measures, a report by JP Morgan indicated.

    But interest rate hikes will not bring about that problem, it said.

    Influenced companies

    The interest rate hike could influence the profitability of companies since borrowing will be more expensive, said Wang Songtao, an analyst with the joint venture investment bank Xiangcai ABN AMBO.

    Companies that have high asset-liability ratios will bear the bigger impacts, he said.

    UBS' Joe Zhang said that after the rate rise, market sentiment towards property stocks along with auto companies are likely to turn negative, while insurance stocks may benefit.

    GTJA Allianz analysts said raw material companies will also be among the most influenced ones. But impacts on airline companies likely will not be big because their borrowing is mainly in foreign currencies.

    Experts also noted that the interest rate rise will have impacts on China's steel, cement electrolytic aluminium industries.

    "The steel companies, especially the medium-scale ones, are likely to suffer a 8 per cent loss in its benefits because of the rate rise," said Wang Changxing, president from a Shandong-based Xingye Mining Company.

 

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