Traders who expected Beijing to wait until the weekend to tighten interest rates got a surprise last night, but the good news is that inflation in China may be peaking.
Chinese stocks (quote) edged slightly lower after the People’s Bank of China announced its latest monetary policy move.
One-year yuan-denominated deposits will now pay 3.5% while one-year loans will charge 6.56%.
Both represent 25 basis-point increases — the third in China so far this year.
While some traders believe the cooling effects of more expensive money will bode ill for the Chinese economy, others are far more concerned that inflation was heading out of control, without the intervention of the central bank.
As it is, consumer prices in China have soared 5.5% on an annualized basis, and many strategists expect the June headline inflation number to crack 6%.
According to Premier Wen Jiaobao, inflation has peaked for now — you heard it here.
The question is whether higher rates will starve the Chinese economy of the liquidity needed for growth. There is some talk of a bubble out there, but few economists currently see a hard landing on the horizon.
In any event, since the People’s Bank of China still officially targets a ceiling of 4% inflation, price stability is clearly a priority over economic growth.
Expect the yuan (quote) and yuan funds like CNY (quote) and CYB (quote) to look strong today.