Interest rates in China are up, which observers see as perhaps the first move toward addressing mounting inflation pressures and asset bubbles. Rates had been steady for several months. From The New York Times:
Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.The People’s Bank of China announced Thursday that the yield from its weekly sale of three-month central bank bills had inched up to 1.3684 percent. The yield had been stuck at 1.328 percent since Aug. 13. An increase of less than 0.05 of a percentage point might sound small, but economists said it was a harbinger of more interest rate increases to come.They cited expectations that consumer and producer prices would rise in the months ahead, particularly compared with low price levels a year ago, when demand temporarily slumped in China as well as the rest of the world. “It is a turning point,” said Ben Simpfendorfer, an economist in the Hong Kong offices of Royal Bank of Scotland. “There is a convergence of events that will lead to higher rates.” The increase in the interest rate turned mainland China’s stock markets into Asia’s worst performers Thursday. The CSI 300 index of shares on the Shanghai and Shenzhen stock markets slumped 1.98 percent.
Given that few commodity stories with any depth can avoid mention of China it is reasonable to wonder whether efforts to fight inflation there will have a negative impact on a variety of markets. China's appetite for soybeans, for example, has been voracious. Closer to the dairy industry, whole milk powder imports have been exceptionally strong. In light of today's news should it surprise that WMP prices were down 7% in the latest Global Dairy Trade auction?
The Goldman Sachs Commodity Index was off to a strong start in the first week of the new year, largely as a function of strength in energy markets. It will be interesting to see if prices come under pressure in the wake of the China news.
