Another Chinese Rate Hike As Early As This Week Expected

Tyler Durden's picture

For anyone who was hoping that China would be the marginal source of liquidity in QE3 absentia (or until it actually does come, which it will), manifested by a halt to monetary tightening and a relapse into that good old methadone state of loose monetary policy, it may be time to pull those SHCOMP limit bids.  China Daily just announced tha "the People's Bank of China is likely to increase the interest rates banks must pay on deposits and the amount of money banks are required to hold in reserve to sop up the excess liquidity now found in the economy and slow inflation, said analysts. The changes in monetary policy may happen before the National Bureau of Statistics makes an expected announcement this week saying that the consumer price index (CPI), an indicator of inflation, hit a record high in May, they said."As a reminder, yesterday Goldman predicted a multi-year high inflation of 5.5% in May courtesy of the biggest drought in 50 years and surging food prices: it turns out that the PBoC, far more responsible that our own central planning charlatans, will not stand for that.

From the article:

"The CPI's increase of 5.3 percent in April over where it had been a year before was obviously exorbitant," said Li Daokui, an adviser to the People's Bank of China and professor at Tsinghua University.

"The central government should and probably will curb this continuously rising inflation by raising interest rates. It would be reasonable to raise China's interest rates by at least 0.75 percentage points this year."

Lu Zhengwei, a senior economist with Industrial Bank, said he predicts the one-year benchmark interest rate for deposits may go from the current 3.25 percent to between 3.75 and 4 percent. After that, the government will raise the reserve requirement ratio for banks more frequently, he said.

An anonymous analyst with China International Capital Co Ltd said the rise in interest rates will occur in June, before the government's expected news about a large increase in the May CPI. The analyst predicted interest rates will go up one further time - probably in the third quarter.

"China's monetary policy in the short-term won't be loose," he said. "The People's Bank of China will continue to tighten it until at least the end of the third quarter, to check fast rises in inflation through adjusting interest rates and the reserve requirement ratio."

If interest rates are raised, that will be the third time that has happened this year. The two previous monetary measures put into effect in 2011 came roughly two months apart from each other. One was enacted on February 8, the last day of China's Spring Festival holidays, and the other on April 5, the last day of the Qingming (Tomb-sweeping) holiday.

A glance at the calendar raises worries that a similar decision will be made on Monday, the last day of the Duanwu (Dragon Boat) Festival holiday.

Li Huiyong, chief macro-economy analyst with Shenyin & Wanguo Securities, predicted that China's May CPI may jump by 5.2 percent above what it was last year, and in June and July will rise to between 5.6 percent and 5.7 percent above what it was during those months in 2010. "The increase to more than 5 percent may last until October."

Credit Agricole Corporate and Investment Bank agreed in a research note saying the CPI will peak at around 6 percent this year, making it impossible to reach the government's target of a 4 percent average increase for the entire year.

"The rises in interest rates have been difficult to impose fast enough to keep up with the CPI's pace, making increases in interest rates an indispensable means of limiting inflation," said Li.

Translated: keep a close eye on the SHOMP. The overnight weakness in the Nikkei which at last check was doing unhot to quite unhot, is about to migrate west (and then to the US, once the robots wake up some time around 4 am).

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lolmao500's picture

They could fix their inflation problem real fast. Get your currency to world currency status.

Ahmeexnal's picture

Recent developments in the Peruvian election: Ollanta Humala leads the vote count.

TPTB will not let Humala win.

Violence is about to erupt in Peru.

DoChenRollingBearing's picture

Just get out.

Buy gold, the real physical stuff in your own possession.  Before it's too late.


Dolemite's picture

Precious metals to present good buying oppurtunity after a near term correction?

Gold and silver showing signs of weakness, and oil is confirming.

savagegoose's picture

wait till china do some tighening, that seems to knock gold on the head a bit.

then buy for a few dollars less.

Dr Zaius's picture

Please forgive the silly question, I'm just trying to get a handle on all this stuff. How would mandates to banks in China to pay higher interest rates and increase reserves be a problem for Treasuries? Is it that yields are to low on Treasuries and the banks must find alternate holdings that will allow them to pay the increased rates mandated by the People's Bank of China?

What_Me_Worry's picture

I think since they peg to us that it doesn't matter what rate they set.  Except for the collateral damage that is causes from increased cost of goods in China that must be passed on to consumers here, due to their razor margins their exports work on.

The amount of USTs that China buys is pretty much as simple as the total trade deficit.  It must keep buying to peg its currency.

theXman's picture

Drought is over. China south is now swamped in water.

Ahmeexnal's picture

They should have kept the drought.

That water now flooding south China is Fukushima water.

Missiondweller's picture

When was that Walmart exec was saying "serious" inflation was going to really hit the US? June?

pacosan's picture

An ice cream cone from McDonald's went from $0.75 to $0.86 last week(tax included). That's around a 14% increase. 

What_Me_Worry's picture

When are those barbaric Chinese going to figure out that food and energy shouldn't be included in the CPI?

Let them eat USTs.

HungrySeagull's picture

We owe money to China who works in factories for us to buy things we desire to have using credit to repay someday on money we will never have.

It's a wonder this Nation works so hard to postpone the inevitable.

The best thing Walmart needs to do now is shut down all China production and procurement. And start up all over again in some dirt village in Liberia or something. Shipping should be a bit easier and more trains run east to west instead of west to east on the land bridge.

Michael's picture

You said it HS. We better find another suppler before the Chinese get a clue and dump our asses. You'd think Wall-Mart would have a clue. They should be setting up peasant sweet shops in Ethiopia even as we speak. How else are ugly Americans going to get their cheep consumer goods fix if the Chinese jack up prices.

HungrySeagull's picture

Not only that, I am beginning to hate Walmart.

They have killed off downtowns all across the land reducing the fine old 5-10 store to little more than a flea market or a Christian mission store. And turned the rest of the blocks into deteroating buildings unfit for further retail service.

YThose too poor to own a car are trapped at the local grocery paying prices that are 20% or more over walmart.

There was a time walmart did not exist 20+ years ago. I think it will not be too difficult to re-adapt to those kind of times all over again. If anyone is left alive long enough to organize it.

bankonzhongguo's picture

I'm just a round eyed small potato, but a real reserve currency is built on gold and machines.

China has the machines, now it just needs to sell UST for physical gold and then a slow parade of ships from US/Europe vaults to China.  PBOC should ask for a public audit of Fort Knox before it buys the next round of UST10Y.

Frankly, all China needs is a swap of defaulting UST for African gold direct from the mines and skip CME entirely. Pay the mines twice the price (its only paper), bank the gold and crash the dollar.

Zhijue shi xianshi.

Ahmeexnal's picture

And you think gold miners are *that* stupid as to be left holding the bag?

What_Me_Worry's picture

They already are doing just that.  One example that is public is buying gold concentrate from Couer's(CDE) Alaska mine and then shipping it to China to be refined.  This allows them to purchase gold without it appearing they are buying gold.  It also doesn't cause them to bid against current supplies and therefore raise the price.

They grabbed this deal before the mine started even started full production.  They also would only take 50% of the total yield.  This seems like they didn't want to grab too much attention to make it look like they were buying a US mine, outright.

Who knows how many deals they have going that we don't know about.

The longer this goes on, the closer they become to being the largest holder of physical gold reserves.  That is what I think they are shooting for and why they are willing to play pretend with USTs.  They wouldn't want the truth to be known.  At least, not yet.

Disclaimer- I still think China will fall harder than the US when this whole bukkake theatre is said and done.

laomei's picture

Something to remember with any and all stories on Chinese inflation.  The CPI in China is calculated hysterically different from that in the US.  Food and energy prices actually make up a very large part of it.  As such, the number is far more realistic.  Something to remember in all this however is that these markets are highly regulated (because China kinda sorta recognizes speculator market manipulation as a bad thing).


Now anyone care to venture a guess as to what the real CPI is in the US using an equal basket of goods?  Do keep in mind that the US response is "nothing to see here, all is well" instead of actual corrective action.


And people think that China is imploding... lol.

HungrySeagull's picture

I don't care about CPI because no one raised the COLA last year. This year? I don't know if we will still be a United States of America after August 2 which is Default day.

topshelfstuff's picture

""""I don't care about CPI because no one raised the COLA last year""""


actually it is now 3 years that there has been Zero Increase in COLA, and a great example of how non-reactive, docile, Americans are. There wasn't a peep, no outrage, demonstrations, demands to not do this. And all this while the top 1%, and top 10%, kept getting a larger slice of the pie. Even in Europe such a move wouldn't get passed w/o enough of a Pubic outcry to force a "reconsideration". It was in 2008 when the US announced no increase in COLA for the next 2 years, and since the Pubil didn't complain, we got it again this year [ now 3 in a row ]

BTW, while its not put in our News, if you were to look at the Increases in China, Asia, all Latin American countries, you'll be amazed. Once again Min Wage, Average Wage, has been increasing by 10% to 25% yearly, along with Purchasing Power increases on their currency. They also have assurances from the Gov to increase intra-year, should it become necessary, if CPI happens to move above the forecast, and the increase would be higher than the CPI increase.

covsire's picture

Don't blame Walmart for that.  Walmart is the effect, Washington is the cause.  The dirty little secret here is that without cheap chinese crap, our quality of life would be much lower because leftists have made it impossible to manufacture anything here.

dolly madison's picture

That's ridiculous.  If cheap stuff couldn't be bought, we would buy more expensive stuff, just less of it. With the quality level of Walmart stuff, we wouldn't be missing much.  Does having a whole bunch of cheap crap really make our standard of living better?

In my grandparents generation (adults in the 50s), they lived like that.  Not tons of stuff, but the stuff they had was quality.  Of course they did it on one salary back then instead of two.

covsire's picture

Cheap chinese electronics more or less work fine.  Produced here, those same electronics would cost at least twice as much and how much better do you think they'll be?

A manufacturer here has to deal with minimum wage laws, compliance and regulation costs, lawsuit risks, union threats and government muscle backing up those threats, environmental groups and eco laws and regulations.  The list goes on.  We simply have no governmental infrastructure to produce these same goods at anywhere near the cost China does. 

Walmart has simply been the most efficient company to make a profit bringing those products to our market.  I hate going to Walmart, but i'm also smart enough to see through the lies that they are the ones responsible for this mess...

brodix's picture

Why can the system afford excess speculation pulling all possible value out of the system, than it can afford excess freeloaders dragging it down? The problem exists at both ends and these ends are destroying the middle. The Chinese are building up their middle.

Troll Magnet's picture

well, maybe our government should think about applying the same set of standards and regulations of wall street to all other sectors.  which would be NO standards or regulations.

savagegoose's picture

i long for the days of $100 for a pc mouse, or a $200 Cd drive. bring manufacture back to the usa and we can have them again

Troll Magnet's picture

you know what?  if our minimum wages were $20 and if our CEO/worker salary ratio wasn't so goddamned out of control, maybe people can actually afford a $100 pc mouse and a $200 CD drive.  although, why would anyone buy a CD drive these days? 

savagegoose's picture

just thinking back to the days i had made in usa and made in jpan on a pc product

Captain_Howdy's picture

With food at 32% of Chinese CPI...these dudes seem to be boxed into a corner.  Of course, because China is an efficient police state, the security services could allow inflationary pressures to increase, arrest the subsequent protestors, kill them, grind them up into meat and then sell the meat to reduce inflationary pressures. Who says we need to rely on monetary policy?

PulauHantu29's picture

With millions of vacant apartments and houses there (as investment property?) just wait until everyone realizes RE does NOT always go up.

The stampede to the exits to SELL, SELL SELL! will be fast and furious more so then the disillusioned in the USA who also were brainwashed into believing something that is an economic impossibility, i.e., that ANYTHING "must always go higher."

laomei's picture

Housing is regulated and investment properties here are 1) rarely flipped and 2) held for the long term.


These "vacant cities" are full of people who were compensated for their land with a mix of apartments and cash.  The vacant apartments were primarily built to absorb investor wealth and take the speculation away from the cities where people actually live.  The vast vast vast majority of these apartments were paid for in cash up front.  If the value drops, they will just turn into rentals or continue to be held.