Interest rate fears fuel 4.5% plunge in Shanghai market

Interest rate fears fuel 4.5% plunge in Shanghai market

(BEIJING) Soaring food prices propelled China’s annual consumer price inflation to 6.5 per cent in August, the fastest pace in nearly 11 years, cementing expectations the central bank will defy the global trend and keep raising interest rates.

The inflation rate published yesterday, up from 5.6 per cent in July, easily surpassed economists’ forecasts of 5.9 per cent. It was the highest reading since December 1996.

Shanghai stocks plunged 4.5 per cent, the biggest daily drop in two months, as investors fretted that higher borrowing costs could help bring the market’s dizzying rally to a halt.

‘Going forward we believe there are non-trivial risks that inflation may continue to edge up,’ economists at Goldman Sachs said in a note to clients. ‘We expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest rate hikes to the benchmark lending and deposit rates by the end of this year.’

China also reported a trade surplus for August of US$24.97 billion. It was the second-biggest on record but slightly lower than forecast as the ending of some tax rebates dented exports.

The ruling Communist Party, aware that inflation has touched off unrest in China down the ages, has voiced increasing concern about the speed of price rises.

A senior party researcher warned on Monday that inflation becomes difficult to control once it exceeds 5 per cent, while a local paper said Beijing had told schools and colleges in the capital not to raise canteen food prices as inflation climbs.

The National Bureau of Statistics said inflation was driven by an 18.2 per cent leap in the cost of food, which accounts for a third of the consumer price basket.

Meat prices rose 49 per cent in August from a year earlier, reflecting a shortage of pork, China’s staple meat.

China’s pig population has fallen 10 per cent due to blue-ear disease and reduced incentives to rear hogs, including fast-rising foodgrain costs and low prices last year.

China, the world’s biggest producer and consumer of pork, could quadruple its imports of the meat this year to 100,000 tonnes to ease the shortage, industry sources said yesterday.

To keep a lid on inflation and prevent the world’s fourth-largest economy from overheating, the central bank has raised interest rates four times this year and ordered banks on seven occasions to tie up more of their deposits in reserve.

As for the market plunge, analysts said that after more than doubling this year to last Thursday’s all-time high, the benchmark stock index might finally be starting a substantial pullback, even though they believe a full-fledged bear market remains very unlikely.

‘All the government policies will have a cumulative impact on the market - eventually, there will be a last straw on the camel’s back,’ said Liu Lifeng, fund manager at BOCI Securities.

Many traders think the market will in coming days slip to psychological support around 5,000 points.

A drop to technical support in the 4,700-4,800 area, where the index’s mid-August peak roughly coincides with the 38.2 per cent retracement of its rally since early July, also looks quite possible.



Source: Reuters (Business Times 12 Sept 07)