China's interest rate rise set to put pressure on stocks

08:43, December 27, 2010      

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Shanghai stocks are expected to extend losses this week because the latest hike in interest rates will weigh on market liquidity, analysts said.

The Shanghai Composite Index lost 2 percent last week - its sixth decline in seven weeks - as the central government has been beefing up efforts to contain inflation.

To battle inflationary pressure and possible asset bubble, the People's Bank of China announced an interest rate increase on Saturday, a Christmas gift investors could do without.

The one-year benchmark lending rate will increase by 25 basis to 5.81 percent while the one-year benchmark deposit rate will rise to 2.75 percent from 2.5 percent effective from yesterday.

The move is the latest after the central bank raised interest rate on October 19, the first time in nearly three years.

But Li Xunlei, chief economist at Guotai Jun'an Securities Co, believed that the 25 basis-point increase ''is not enough and more hikes are needed.''

Kou Jianxun, an analyst with Soochow Securities Co, said that the interest rate hike "is sure to hit the market, which is already struggling with a tighter supply of capital. Shares of capital-intensive industries such as property developers will take a blow."

Since mid-October, China has raised banks' reserve requirement ratio three times to 18.5 percent for the country's biggest lenders and 15 percent for smaller banks.

The consumer price index surged to a 28-month high of 5.1 percent in November.

Source: Shanghai Daily
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