BIZCHINA / Review & Analysis
Interest rate rise won't push up RMB's value
By Yi Xianrong (China Daily)
Updated: 2006-08-31 09:28
The People's Bank of China's interest-rate hike, which took effect on
August 19, has not produced a big bang as the one in October 2004 did.
Why not? The 2004 interest-rate increase was the first since China's
entry into the World Trade Organization (WTO) in late 2001 and also the
very first after the domestic financial market became highly
market-orientated. Furthermore, the 2004 hike directly impacted the
people who borrowed loans from banks to buy housing. All this combined to
raise the media's and people's concerns about the interest-rate rise.
This time, however, the increase came at a time when the market has
become more mature and the central bank has put in place a policy of
preferential interest rates for housing buyers.
But the most talked about issue is whether or not the latest
interest-rate rise would boost pressure on the renminbi to appreciate.
The generally accepted theory dictates that an interest-rate hike
automatically pushes up the value of the currency. By this theory, the
current interest-rate rise would raise the expectations of investors and,
in turn, encourage overseas capital to flood into China, betting on the
renminbi's revaluation. This kind of capital, as expected by investors,
could reap profits from the renminbi's interest hike as well as from its
appreciation. Moreover, the investors would be able to profit by having
access to the domestic stock and real estate markets and the markets of
resources-based products, killing three birds with one stone.
Garnering such fat profits, however, is conditioned on a number of
factors. First, the renminbi and foreign currencies must be freely
convertible into one another. Second, the return rate on the
international financial market must remain lower than the margin in which
the renminbi is revaluated. Third, the domestic capital market must boom
while barriers to market access are non-existent.
None of these preconditions have currently been met.
To begin with, the renminbi does not enjoy free convertibility at
present, though international investors are craning their necks for the
appreciation of the Chinese currency, which constitutes a kind of
pressure for revaluation.
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