China raised interest rates for the second time in 2021 to curb inflation pressures. The one-year deposit rate was increased to 3.25% and lending rate to 6.31%. This move was expected after China also recently raised bank reserve requirements. Inflation remains high in China, with consumer prices at 4.9% in February and producer prices accelerating. The interest rate hike aims to support a soft economic landing by slowing credit growth and cooling demand.

1. Economics /
.Mean S Capital Market Perspectives
KBank Strategy
China raised interest rate for the second time this year FX / Rates
5 April 2011
Overview: Nalin Chutchotitham
China announced today that 1-year deposit and lending rates would be increased by nalin.c@kasikornbank.com
another 25bp, starting April 6th, marking the second time it had raised borrowing costs this
year and the fourth time (since Oct 2010) that interest rates had moved in the aftermath of
the 2008 global financial crisis.
The new interest rates for 1-year deposits and 1-year loans would then become 3.25% and
6.31%, respectively.
In order to avoid market’s negative reactions, China had used its public holiday to
announce the move, similar to a few of its previous actions. In fact, the interest rate
increase was not unexpected, especially after China’s recent increase of the reserve
th th
requirement ratio for banks’ deposits on March 25 (announced March 18 ). The Chinese
stock markets may even avoid negative response tomorrow.
The motivation of interest rate hike is no doubt, to curb price pressure building from the Disclaimer: This report
inside and outside of China. Consumer price inflation remained high at 4.9% in February,
must be read with the
nearly a per cent higher than the authorities’ target of 4.0% average this year and demand
Disclaimer on page 5
continues to stay robust, threatening a sustained high level of inflation. Moreover, producer
price inflation had been accelerating during the past two months to 7.2% in February, as that forms part of it
China is also unable to avoid higher commodity prices across the globe.
Chinese banks’ reserve requirement ratios China’s 1-year deposit and lending rates
% %
21 8
20
7
19
18 6
17
5
16
15 4
14 3
13
2
12
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Jul-09 Jan-10 Jul-10 Jan-11
major banks small banks 1-year deposit rate 1-year prime lending rate
Source: Bloomberg, KBank Source: Bloomberg, KBank
China’s leading and coincident economic indices China’s inflation rates – consumer and producer
%
108
12
106 10
104 8
6
102 4
100 2
0
98 -2
96 -4
-6
94 -8
92 -10
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10
China Coincident Economic Index China Leading Index (pushed forward 3m) consumer price index, YoY producer price index, YoY
Source: Bloomberg, KBank Source: Bloomberg, KBank
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2. The overall response to China’s gradual but clear trend to tighten monetary conditions
should be positive. The global financial markets seemed to be pleased when China’s
economic data continued to grow but exhibiting less steam. This means that the
government’s efforts had been working at the very least and China’s economic expansion
would continue to support world growth as well. Observe below the figure on China’s
leading economic index which showed a slowing down trend. We have also provided a
table of China’s economic data at the back page to show that there are indicative signs that
the economy is going through a soft-landing.
As for impacts on the foreign exchange market, China’s policy actions should reaffirm that
the pressure on the Chinese yuan to appreciate further had increased. The authorities are
likely to use a stronger currency to ease pressure from imported products gradually. No
doubt, the international pressure would remain high and China would try to manage it by
displaying that the accumulated trade balance surplus had declined, given the slowdown in
exports and increased domestic demand.
Such an outlook on Chinese yuan’s appreciation would help guide Asian currencies
stronger as well, especially those countries with significant trade relationship with China. As
exporters to China, these countries should benefit when the yuan becomes stronger and
export orders grow. Meanwhile, those viewing China as a trade rival may also be able to let
their currencies appreciate without worrying about losing price competitiveness.
UN food price index vs Reuters/Jefferies commodity
USD/CNY spot and USD/CNY 12m NDF
price index
USD/CNY Spot and Non-deliverable forwards 500 250
6.9
450
6.8 400 200
6.7 350
6.6 300 150
6.5 250
200 100
6.4
150
6.3
100 50
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
00 01 02 03 04 05 06 07 08 09 10 11
CNY NDF 12m USD/CNY Reuters/Jefferies Commodity price index (LHS) UN FAO Food price index (RHS)
Source: Bloomberg, KBank Source: Bloomberg, KBank
Asian currency performance against USD, year-to-date Policy rate changes
% 6m ago Current
JPY -3.8% Change against USD, year-to-date 12
THB -0.4%
10
TWD 0.4%
8
INR 0.6%
PHP 0.9% 6
CNY 1.0% 4
MYR 1.2% 2
SGD 1.8%
0
KRW 3.3%
South Korea
Australia
Philippines
Brazil
US
UK
Singapore
Japan
Canada
Eurozone
Taiwan
Thailand
New Zealand
India
China
Indonesia
Russia
Malaysia
IDR 3.9%
-5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Source: Bloomberg, KBank Source: Bloomberg, KBank
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3. Table 1. China Economic Indicators
Q3 2010 Q4 2010 Q1 2011
Jul Aug Sep Oct Nov Dec Jan Feb Mar
Real GDP (yoy %) -- -- 9.6 -- -- 9.8 -- --
Yearly Real GDP (yoy %) -- -- -- -- -- 10.3 -- -- --
Consumer Price Index (yoy %) 3.3 3.5 3.6 4.4 5.1 4.6 4.9 4.9
Industrial Product Price Index (yoy %) 4.8 4.3 4.3 5 6.1 5.9 6.6 7.2
Raw Materials Purchasing Price (yoy %) 8.5 7.5 7.1 8.1 9.7 9.5 9.7 10.4
Wholesale Prices (yoy %) 5.9 6 6.1 7.8 8.6 7.9 8
Unemployment Rate (%) -- -- 4.1 -- -- 4.1 -- --
Industrial Production Cumulative (yoy %) 17 16.6 16.3 16.1 15.8 15.7 14.1
Fixed Assets Investment Urban Cumulative (yoy %) 24.9 24.8 24.5 24.4 24.9 24.5 24.9
Foreign Direct Investment Cumulative (yoy %) 20.6 18.1 16.6 15.7 17.7 17.4
Bank Lending (yoy %) 18.4 18.6 18.5 19.3 19.8 19.9 18.5 17.7
Manufacturing PMI (sa) 51.2 51.7 53.8 54.7 55.2 53.9 52.9 52.2 53.4
Business Climate Index -- -- 137.9 -- -- 138 -- --
New Orders PMI (sa) 50.9 53.1 56.3 58.2 58.3 55.4 54.9 54.3 55.2
OECD Leading Indicator (12-mo %) 13.3 12.3 11.8 11.7 11.7 11.8 11.9
Leading Economic Index 102.8 102.4 102.4 102.1 101.9 101.4 101 101
Coincident Economic Index 102 101.8 101.8 102.4 102.7 103.6 102.9 102.5
Business Cycle Signal Index 102.7 106.7 106.7 106.7 108 106.7 109.3 109.3
Industrial Production (yoy %) 13.4 13.9 13.3 13.1 13.3 13.5 14.9
Real Estate Climate Index 104.7 104.1 103.5 103.6 103.2 101.8 102.9
Land Transaction Price (yoy %) -- -- 21.3 -- -- 14.8 -- --
Retail Sales Cumulative (yoy %) 18.2 18.2 18.3 18.3 18.4 18.4 19.9 15.8
Current Account Balance (USD bn) -- -- 204 -- -- 306.2 -- --
Goods and Services BoP (USD bn) -- -- 155.5 -- -- 80.5 -- --
Monthly Trade Balance (USD bn) 28.7 20 16.9 27.1 22.9 13.1 6.5 -7.3
Exports (yoy %) 38.1 34.4 25.1 22.9 34.9 17.9 37.7 2.4
Imports (yoy %) 22.7 35.2 24.1 25.3 37.7 25.6 51 19.5
M1 Money Supply (yoy %) 22.9 21.9 20.9 22.1 22.1 21.2 13.6 14.5
M2 Money Supply (yoy %) 17.6 19.2 19 19.3 19.5 19.7 17.2 15.7
Regulated Reserve Ratio (%) 17 17 17 17 18 18.5 19 19.5 20
Official Foreign Exchange Reserves (USD bn) 2,539 2,548 2,648 2,761 2,768 2,847
Three-Month SHIBOR (%) 2.45 2.51 2.61 2.83 3.25 4.62 5.75 4.91 4.17
Three-Month CHIBOR (%) 2.45 2.83 2.6 3.3 4.5 4.62 6.8 4.6 4.3
10-Year Gov't Bond Yield (%) 3.29 3.27 3.33 3.7 4.01 3.91 4.02 4.03 3.91
Stock Prices Index (Shanghai Stock Exchange) 2638 2639 2656 2979 2820 2808 2791 2905 2928
CNY/USD Exchange Rate 6.78 6.81 6.7 6.69 6.68 6.62 6.59 6.58 6.56
Source: Bloomberg
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4. Table 2. Monthly Key Economic Indicators Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan-11 Feb-11 Mar-11
Manufacturing index 182.4 189.4 188.0 189.1 189.9 192.1 188.5
% YoY 8.4 8.1 6.0 5.7 -3.4 4.1 -3.4
Industrial capacity utilization rate (%) 63.6 64.4 63.9 63.6 62.4 62.3 59.1
Retail sales (% YoY) 8.6 9.1 5.4 8.2 8.0 8.1 n.a.
Passenger car sales (units) 65,724 68,261 72,012 78,874 93,122 68,398 77,213
Motorcycle sales (units) 154,388 146,887 143,791 152,767 167,707 165,152 188,248
Unemployed labor force ('000 persons) 353 343 355 389 268 374 n.a.
Commercial car sales (units) 0.9 0.9 0.9 1.0 0.7 1.0 n.a.
Consumer prices (% YoY) 3.3 3.0 2.8 2.8 3.0 3.0 2.9
core 1.2 1.1 1.1 1.1 1.4 1.3 1.5
Producer prices (% YoY) 11.3 11.6 10.0 7.1 4.7 6.0 7.4
External Accounts (USD mn, unless specified otherwise)
Exports 16,292.0 17,955.0 17,046.0 17,584.0 17,220.0 16,523.0 18,406.0
% YoY 23.6 21.8 16.6 28.7 18.6 21.4 29.1
Imports 15,440.0 14,712.0 14,773.0 17,094.0 15,911.0 17,111.0 16,375.0
% YoY 41.8 15.7 14.4 35.0 8.8 31.2 18.6
Trade balance 852.0 3,243.0 2,273.0 490.0 1,309.0 -588.0 2,031.0
Tourist arrivals ('000) 1,268 1,220 1,360 1,500 1,840 1,810 1,822
% YoY 12.5 1.9 6.3 10.3 9.5 12.8 12.8
Current account balance 280.0 2,767.0 2,740.0 1,019.0 1,750.0 1,090.0 3,823.0
Balance of payments 3,589 4,270 5,822 820 2,263 1,689 4,271
FX reserves (USD bn) 154.7 163.1 171.1 168.2 172.1 174.0 179.2
Forward position (USD bn) 12.1 11.1 12.6 15.3 19.6 19.0 17.7
Monetary conditions (THB bn, unless specified otherwise)
M1 1,181.4 1,175.5 1,202.3 1,235.4 1,302.4 1,326.2 1,346.4
% YoY 11.4 11.7 11.4 10.8 10.9 15.5 13.4
M2 10,968.1 11,116.1 11,323.3 11,497.6 11,776.4 11,819.2 12,146.9
% YoY 8.5 9.9 11.2 11.1 10.9 11.5 13.7
Bank deposits 10,016.0 10,091.6 10,206.0 10,392.3 10,583.4 10,607.0 10,827.7
% YoY 6.6 7.8 8.5 8.1 8.7 8.9 10.2
Bank loans 9,299.8 9,432.7 9,580.3 9,751.1 9,934.4 10,058.9 10,207.3
% YoY 9.8 10.8 12.1 12.2 12.5 14.4 15.0
Interest rates (% month end)
BOT 1 day repo (target) 1.75 1.75 1.75 1.75 2.00 2.25 2.25 2.50
Average large banks' minimum lending rate 6.00 6.00 6.00 6.00 6.12 6.37 6.37 6.62
Average large banks' 1 year deposit rate 0.98 1.11 1.11 1.11 1.32 1.51 1.51 1.67
Govt bond yield 1yr 1.99 2.01 1.98 2.11 2.38 2.54 2.68 2.83
Govt bond yield 5yr 2.69 2.56 2.83 2.98 3.26 3.40 3.48 3.41
Govt bond yield 10yr 3.01 3.12 3.18 3.59 3.77 3.85 3.89 3.75
Key FX (month end)
DXY US dollar index 83.20 78.72 77.27 81.20 79.03 77.74 76.89 75.89
USD/THB 31.27 30.35 29.94 30.21 30.06 30.93 30.60 30.25
JPY/THB 37.14 36.34 37.18 36.11 37.01 37.60 37.47 36.54
EUR/THB 39.65 41.38 41.76 39.22 40.23 42.35 42.25 42.88
Source: Bloomberg
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5. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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