Global markets briefly went into a flutter yesterday when the People’s Bank of China, that is the Chinese Central Bank, sent out a monetary tightening signal by upping its short-term inter-bank rate for the first time in five-months. Although the hike was miniscule mere four basis points, does it signal hardening of policy rates in China? Is the rate curve finally turning?
In an interview with CNBC-TV18, Alex Barrett, Global Head – Client Research at Standard Chartered said the rate hike was as per expectations. “We have got probably a couple of rate hikes towards the second half of the year.”
However, Barrett does not expect any dramatic tightening from China this year. “We are expecting still the loan growth to be very strong for the first quarter and we are certainly not expecting the Chinese to tighten the policy too much. But this is a nice little signal from them to keep people calm.”
Below is a verbatim transcript of the interview. Also watch the video.
Q: What did you make of yesterday’s move by the People’s Bank of China (POBC)?
A: We were a little bit surprised about the timing but we are expecting them to tighten rates at some time during this year. This is a very small move initially but it does give a bit of an indication. Probably the markets may overreact a little bit but we have got probably a couple of rate hikes towards the second half of the year that we are expecting to come in. But we are not expecting a dramatic tightening from China this year.
Q: But would that change at all after yesterday’s move? Do you think yesterday’s move was an omen of further tightening to come in the next six-months or so?
A: We think the tightening for the next six-months would be a very minimal but will be very minimal but if anything this maybe is just a signal for people not to get a bit too carried away. Certainly, markets have done very well last year and maybe a little bit of euphoria was building into the markets. The Chinese authorities wanted to just put down the market to say, “Don’t get too carried away. We are going to have to take some of the stimulus back, tighten up rates towards the end of the year. And don’t get too carried away at the beginning of the year.”
We are expecting still the loan growth to be very strong for the first quarter and we are certainly not expecting the Chinese to tighten the policy too much. But this is a nice little signal from them to keep people calm.
Q: What implications does this have for the commodity and the currency markets?
A: This is something that the commodity markets and the currency markets should take onboard. It’s not something, which means that China is going to move very rapidly in the short-term. We are still expecting quite strong loan growth this year. We are expecting a high GDP growth of about 10% for the full year. China definitely wants to continue to grow but it doesn’t want to be getting back to very frothy rates that we saw back in 2007 of about 14%
Definitely they are going to reign in inflation. They are going to keep an eye on that – they don’t probably want to see going much above 4%. That is going to be one of the factors they keep an eye on. I think this is just a case of telling everybody at the beginning of the year, don’t get too carried away.
Q: So you don’t see any considerable impact on commodity and currency markets because some of the commodity markets have run up quite a bit?
A: From the commodity point of view, we still strong demand. If we see overall growth at China at something like 10% that means it’s a lot more stuff that is going to get consumed in China. We are going to have a bigger economy going forward there. There maybe certain commodities that may suffer. We saw copper prices fall yesterday but actually this is a very small move. It’s really more of a signal not that we are going to see a dramatic tightening and trying to slow the economy. It’s just China tell the people not to get too carried away.
When it comes to the currency point of view again the markets maybe building a little bit too much for appreciation of the Yuan. We are not expecting to see anything until the second half of the year and even then probably very minor move as they de-peg US Dollar and maybe later appreciate 2-3%.
It is not going to knock the recovery in the export market on ahead by having a dramatic move. There are still a lot of marginally profitable exporters out there who are just starting to get back on their feet. We are expecting to see export growth come back in. That should be released on Monday or Tuesday. That will be the first time for while but that is coming off a low base and it’s still relatively fragile and we are not expecting the Chinese to actually derail that recovery.