Asian Daily: China - China Economics

Abstract:

-Interest rates were raised for the sixth time this year, effective 21 December. The one-year time deposit rate was raised by 27 bps to 4.14%, while the one-year lending rate was raised by 18 bps to 7.47%.
-A new move in this tightening is that short-end fixed deposit rates were raised by more than the long-end rates. The demand deposit rate, however, was cut.
-There are two interpretations to this move: (1) the government is now prepared for high inflation to persist and has raised rates more aggressively to compensate for that; (2) the government seems to have become more practical by offering higher interest rates at the short end to retain deposits, recognising that depositors may not want to lock up their capital for several years. 
-Our view on rate hike remains unchanged - four more hikes in both deposit and lending rates, by 27 bps on average, with deposit rates going up slightly more than the lending rates.
The PBoC announced that it would raise deposit rates and lending rates for the sixth time this year, effective 21 December. The one-year time deposit rate was raised by 27 bps to 4.14% (up from 3.87% previously), while the one-year lending rate was raised by 18 bps to 7.47% (from 7.29% previously). However, interest rates for demand deposits were lowered by 9 bps to 0.72% from 0.81% previously, reflecting the government's effort to discourage the outflow of capital for property and stock market transactions (the demand deposit accounts are typically for transactional purposes). According to the PBoC, this rate hike was meant to reflect a "tightening" monetary policy stance as designated at the Central Economic Working Conference, with the aim to prevent the economy from becoming "overheated" and to forestall the emergence of widespread inflation.
This hike was widely expected by the market after the very strong CPI inflation data in October and November, but the timing was delayed. Instead, the central bank has raised the reserve requirement ratio by a total of 200 bps since its last rate hike in September.
A new move in this tightening is that the short-end deposit rates (except demand deposits) were raised by more than the long-end to attract deposits to stay within the banking system. The three-month deposit rate, for example, was raised by 45 bps, while five-year fixed deposit rate was raised by only 9 bps. We read this move with two interpretations: (1) the government now is prepared for high inflation to persist, and hence a more aggressive rate hike is needed to keep up with rising inflation; (2) the government seems to have become more practical by offering higher interest rates at the short-end, recognizing that depositors may not want to lock up their capital for several years. Together with the cut in the demand deposit rate, we think this move is designed to encourage deposits to stay within the banking system and to prevent them from flowing out into the stock and property markets. This is consistent with our expectation that better terms will be offered to retain saving deposits, but in a more refined, realistic manner.
Several tightening measures were launched since the conclusion of the Central Economic Working Conference in early December. We believe that Beijing is trying to prevent bank loans from surging again in the beginning of the new year, a pattern that had developed over the past four years. The message on continued tight monetary policy stance is loud and clear. However, given that loan growth was very low in November already, we do not see that bank credit could be further tightened in the beginning of 2008, compared with a month ago. Recent hawkish comments from the central bank and the planning agency, in our view, are aimed at preventing a resurgence of bank lending in January, rather than indicating further tightening. Our view on rate hikes remains unchanged-four more hikes in both deposit and lending rates, by 27 bps on average, with deposit rates going up slightly more than lending rates.