Markets differ on 2nd rate increases

08:45, December 28, 2010      

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Stock and currency markets declined in response to China's second rate increases this year while gold regained lost ground.

Gold clawed back ground yesterday as bargain hunting rushed in after prices fell about 1 percent in early trade in New York following the People's Bank of China increasing interest rates on Saturday, the second rise in just over two months as part of beefed-up moves to tame inflation.

On Sunday, the one-year benchmark deposit rate rose to 2.75 percent from 2.5 percent while the one-year benchmark lending rate also gained by 25 basis points to 5.81 percent.

Domestic gold prices inched up 0.03 percent to end at 298.49 yuan (US$44.89) a gram yesterday at the Shanghai Gold Exchange.

"The recovery of gold showed that investors are eagerly seeking opportunities to buy," said Xin Tianli, a Tianyi Gold Co analyst.

But as major investors have not returned from holidays, it may still be too early to see the big picture of the gold market, said a report from 24k99.com, an industry website.

Bullion reached a high of US$1,431.25 an ounce on December 7 and is heading for a 10th straight annual gain, the longest winning streak in at least nine decades.

China set the central parity rate of the yuan at 6.6305 against the US dollar in the morning session yesterday, from Friday's close of 6.6270. The yuan edged down to 6.6308 yesterday, according to the China Foreign Exchange Trade System.

Despite yesterday's loss, economists are expecting a stronger yuan in 2011.

"The yuan is expected to head to a quicker appreciation in 2011 among a basket of measures to curb inflation," said Lu Zhengwei, an Industrial Bank senior economist.

The rate increases on Christmas Day showed that the PBOC is front loading measures to fight inflation and it's unlikely there will be a rate hike in January, Lu said. Instead an appreciating yuan is more likely to check imported inflation, he added.

Liao Qun, chief economist of CITIC Bank International, revised upwards his forecast of a yuan appreciation to 4-6 percent against the greenback in 2011, from a previous estimate of 3-5 percent.

The Shanghai Composite Index yesterday tumbled 1.9 percent, or 53.76 points, to 2,781.4, the lowest close since October 8. Turnover climbed to 123.39 billion yuan from 95.89 billion yuan on Friday.

Stocks responded to the news with an advance of up to 1.5 percent in the morning session. However, they started to fall in the afternoon on concerns that a tightening monetary policy may slow growth in the world's second-largest economy.

The real estate industry led losses as investors are concerned that the higher interest rate will drain developers' capital and increase individuals' borrowing costs on homes.

The rate increase over the weekend has not had a major impact on commodities so far.

Base metals on the Shanghai Futures Exchange ended almost unchanged. Copper for March delivery settled 0.4 percent higher at 68,710 yuan a ton while aluminum closed 0.15 percent down at 16,695 yuan.

Crude oil recovered in electronic trading on the New York Mercantile Exchange.

Wang Qian, a JP Morgan economist, said she expected two more rate rises in the first half of 2011 to counter inflation.

China's Consumer Price Index, the main gauge of inflation, rose 5.1 percent in November, a 28-month high. Food prices jumped 11.7 percent in December - the highest since July 2008.

Source: Shanghai Daily
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