China to raise benchmark rates

[PassiveReturns]

In the first such move since 2007, the nation's central bank is set to increase the deposit rate to 2.5% and the lending rate to 5.56%. Analysts say the action could begin to remedy China's soaring housing prices, accelerating inflation.

Reporting from Beijing , In a surprise move that many economists were calling for, China's central bank said Tuesday it would hike its benchmark lending and deposit rates for the first time in three years.

The move is the clearest sign yet that policymakers are concerned about excess liquidity and over-investment in the world's second-largest economy.

China has been deluged with easy money since the country's banks issued a record $1.4 trillion last year to combat the effects of the global financial crisis.

[Musicwhiz]

China better do something about their property market. It's getting to be even worse than Hong Kong.....

[PassiveReturns]

For the first time since 2007, People's Bank of China raised the one-year interest rate to 5.56% from 5.31%. The decision comes ahead of inflation data for China to be released on Thursday, which is expected to show an increase of 3.6%, according to economists surveyed by Bloomberg.

The rate increase may impact U.S. negatively since China's economy has been a major force in supporting the global economic recovery.

In the U.S., housing starts increased for the third consecutive month. Housing starts for September came in at 610,000, beating the expected 580,000. The number represents a 4.1% increase from the year-ago period and a more modest 0.3% on a quarter-to-quarter basis.

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NEW YORK (Dow Jones)--Crude futures fell Tuesday after China's surprise move to raise interest rates sparked worries that the country's growing demand for raw materials could slow.

Light, sweet crude for November delivery recently traded $2, or 2.6%, lower at $81.08 a barrel on the New York Mercantile Exchange. The November contract expires Wednesday and trading was concentrated in the December contract, which fell $2.22 to $81.58.

Brent crude on the ICE futures exchange traded $2.07 lower at $8230 a barrel.

The People's Bank of China unexpectedly raised the one-year lending and deposit rates by 25 basis points each, effective Wednesday, a move that is likely to slow down China's rapid growth.

The rate hike spurred the dollar higher, which also weighed on crude as a strong dollar makes oil more expensive for buyers in other currencies.

"You are seeing the knee-jerk reaction to the China hike, along with the dollar," said Matt Zeman, Chief Market Strategist with LaSalle Futures. "Any steps China takes to slow their economy are going to slow the global recovery as well. It's going to have a far reaching ripple effect."

The ICE dollar index, which measures the dollar against a basket of currencies, was recently up 1.2%. The euro was recently down 0.8% to $1.3842.

Last week, oil markets cheered a report showing oil imports into China reached a record high of 5.67 million barrels a day in September. With U.S. weekly demand for oil and fuel products at the lowest level in nearly a year, traders and analysts have been hoping that international demand will help keep prices stable.

Crude has traded above $80 a barrel through October as a weakening dollar and the threat of widespread currency devaluation sent investors looking for hard assets, including commodities.

U.S. inventories of oil and fuel products have also retreated slightly from 27-year highs hit in September.

Weekly data from the U.S. Department of Energy due 10:30 a.m. EDT Wednesday, however, is expected to show a 2.4 million barrel build in crude stockpiles. Gasoline stockpiles are expected to fall by 1.3 million barrels, while inventories of distillates, which include heating oil and dielel, are seen falling by 900,000 barrels.

Meanwhile, strikes across France have disrupted production at all of the country's 11 operating refineries and one Swiss plant. French refineries account for nearly 12% of European refining capacity.

Industrial action at France's Fos-Lavera oil terminal, the world's third-largest port for oil imports, has kept dozens of ships from unloading.

Front-month November reformulated gasoline blendstock, or RBOB, recently traded 6.03 cents lower at $2.0912 a gallon. November heating oil recently traded 5.08 cents lower at $2.2253 a gallon.

[Musicwhiz]

In my personal opinion, Singapore ought to start raising rates too. This will help to limit the bubble which property is currently undergoing due to super-low SIBOR rates!

[Jacmar]

In my personal opinion, Singapore ought to start raising rates too. This will help to limit the bubble which property is currently undergoing due to super-low SIBOR rates!

Singapore will not raise rates as the "gahmen" has said that it will not use monetary policy to run the economy and rely on fiscal policy instead. the reason why it won't use monetary policy is bcos it wants sgp to be a financial centre and to play in the same field as the other financial centres ie NY, London, Tokyo means your monetary polcy/interest rates is link which at the moment is very low interest rates.

so get use to the very low interest rates for a couple of years and in the meantime time expect more measures from the gahment to control asset inflation. next thing to come is lowering of yr cpf interest rates.

[kazukirai]

In my personal opinion, Singapore ought to start raising rates too. This will help to limit the bubble which property is currently undergoing due to super-low SIBOR rates!

Hi MW,

It's not so much whether MAS wants to raise rates or not but simply that they can't. Not with a managed-float exchange rate and, as Jacmar has said, free capital controls to promote SG as a financial hub.

In macroecons, this is known as the Impossible Trinity or Trilemma. (Wikipedia link)

In short:

The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of Impossibility or Unholy Trinity) is the Trilemma in international economics suggesting it is impossible to have all three of the following at the same time:

* A fixed exchange rate.
* Free capital movement (absence of capital controls).
* An independent monetary policy.

[cyborg]

An example stated by Paul Krugman describes the Impossible Trinity clearly :

The point is that you can't have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain--or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).

[ag88]

asia & esp singapore being a small country is in a v uncomfortable position

in feb 1996 SGD hit a high against JPY and continued north, while STI continue to trend down gradually for some 1 1/2 years. i guess yen carry trade back then is the norm

the strong SGD disadvantaged manufacturing in SG heavily forcing manufacturing to move out gradually from SG, SG literally go into a recession while SGD gain strength.

the recession, downtrend continued till may 1997 when the fateful event occured, japan raised interest rates, the yen carry trade reversal created whiplash & if u like a liquidity tsunami (crisis) quickly, 1st with thailand & hedge funds wasted no time with shorts on mkts and regional currencies. that goes down in history as asian financial crisis 1997
http://sg.finance.yahoo.com/q/bc?s=^STI&...&z=m&q=l&c=

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fast forward to 2010, 2011: a dream:

SGD hit a high against USD and asian properties bubble have reached lofty valuations or in china's case a quantity bubble. And in SEA, hongkong a price bubble.

USD continue weakening against SGD and regional currencies. Now they are clamoring for RMB (yuan) to be strengthened. This will hit and coutinue to hit export oriented industries (e.g. manufacturing , services etc etc ) in asia hard.

This pushes asia into the edge and asia goes into recession in 2011. In the mean time, USD continued falling and big ben continued to set interest rate at zero in US.

Supposingly US continue on a recovery and inflation becomre more apparent in US. USD start strengthening against asian currencies while inflation continue to become more pronunced. And fateful one day big ben raise interest rates:

Mother of all Carry Trades Faces an Inevitable Bust
http://www.roubini.com/roubini-monitor/2...table_bust

a carry trade reversal on the world's reserve currency, in the trillions of $ world wide pushed to the limit, how large the tsunami would look like?

the question most have is when it'd happen, if only we know the answer

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sound like a night mare, hope central banks round the world work together to avert a possible disaster

[PassiveReturns]

ag88, this is scary.

[arthur]

When we reach the next market euphoria state, Dr Doom will quickly be forgotten and so do all the funds under him.

I am not a perpetual bull but Roubini has been a bear since the Credit Crisis started and he still is being a bear while the market has corrected so far.

Either way, sometimes I do understand why Graham says not to look at the market news but rather the business fundamental itself. Hearing too much of bad stuffs really makes one sick in the mind and portfolio's value.

For more perpetual bear news.. Please google Zerohedge website.
You may find articles of financial Armageddon starting when the Credit Crisis happened till now.

Today at 1st Nov 2010, we have another 2 pieces of good news from China PMI and US ISM index. Double dip? Not anytime soon but volatility is there as I have repeated.

Market euphoria ie. Final stage yet to set in, but we may be seeing the sign of it starting few months down the road.

Hold on ladies and gentlemen, let the good times roll!!