China's bid to tighten liquidity underlines its immunity from global financial turmoil
August 23, 2007
By Peter Harmsen
Beijing - China's bid to tighten liquidity while most central banks worldwide are battling to boost cash flows underlines the Asian giant's status as largely immune from the troubles afflicting global markets.
The financial insulation, highlighted in a decision to raise interest rates again, is an arrangement of China's own making, as it combines a not fully convertible currency with limited access to capital markets.
"Fundamentally, the impact the global economy has on China is much, much smaller than on other Asian economies," said Ma Jun, a Hong Kong-based economist with Deutsche Bank.
Worries about the US mortgage market have caused liquidity to dry up in money markets as private banks withhold funds, prompting US and other central banks to offer extra cash.
China is doing the opposite, sucking up as much cash as possible in an only partly successful attempt to prevent it flooding into stocks and property.
"China's central bank is not concerned about the global financial market havoc creeping into the domestic market," said Stephen Green, a Shanghai-based economist with Standard Chartered. "China is still a different universe, it seems, when it comes to liquidity and growth momentum."
China's central bank raised the benchmark lending rate by 0.18 percentage points to 7.02 percent yesterday. The deposit rate rose 0.27 percentage points to 3.6 percent.
This was the latest chapter in China's prolonged struggle with excess liquidity.
"The high level of liquidity is mainly from our large trade surplus plus incoming foreign direct investment," said Feng Yuming, a Shanghai-based economist with Orient Securities. "In addition, there's a great deal of hot money, although it's tough to estimate exactly how much."
The surprise rate hike, which is the fourth this year, suggested a more hawkish central bank than many expected. It sent a message to markets about the continued independence of Chinese economic policy making.
"It's also a signal to the domestic market: even at a time of a liquidity crunch overseas, China will not change its policy of tightening," said Sun Lijian, an economist at Shanghai's Fudan University. But risks remain, especially given that the move take place at the same time as the US is lowering interest rates.
"It will strengthen the pressure for the Chinese currency to rise, and even more money will flow in," said Han Zhiguo of Beijing Banghe Fortune Research. "This, in turn, will greatly boost liquidity and heighten inflationary pressures."
It would seem to be a never-ending story, as the policy response might be more rate hikes, which, in turn, would encourage fund inflows, and so on.
Little by little, however, China is opening up for greater integration with overseas financial markets.
This is reflected in a move this week to allow one bank branch in the northern city of Tianjin to offer direct investment in Hong Kong stocks.
As a result, $40 billion (R300 billion) could flow to Hong Kong stocks in the coming 12 months, according to Deutsche Bank's Ma. "But it will be another three to five years before China heads towards full convertibility, and only then will it be possible to say that it has genuinely linked up with global financial markets." - AFP
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