International | Jun 06 2006
By Rudi Filapek-Vandyck
The US Federal Reserve may find itself behind the cyclical curve in the coming months, as suggested by several commentators who believe the combination of slowing economic growth and rising inflation is about to put Fed chair Bernanke and Co in serious limbo. At DBS the analysts believe the same principle applies to the Chinese authorities.
Chinese government officials have been announcing further administrative measurements to cool down overinvestment in certain areas, including the Chinese property market, but DBS believes the government will soon have to draw the conclusion this problem is no longer manageable with administrative regulations only.
China needs higher interest rates and a stronger currency, DBS argues, posing the problem that the first will attract even more speculators who want to benefit from the direct impact on the second.
The expectation is therefore that higher interest rates won’t become reality anytime soon, however, to achieve a stronger currency the authorities may well sit on their bums and wait for things to take course without intervening, DBS argues.
This vision is obviously based upon the expectation that the US dollar will feel downward pressure increasing in the second half of 2006. This will make it easier for Chinese authorities to allow the yuan to appreciate further and faster in DBS’s view.
The analysts maintain, however, it would not be very wise to keep domestic interest rates too low for too long. One of the obtacles to start raising Chinese interest rates, DBS believes, is the IPO of one of the largest banks in the country, ICBC, which is scheduled to take place in the final quarter of 2006.
DBS nevertheless believes the second half of the current calendar year will see both higher Chinese interest rates and a further appreciating yuan, with the expectation that the currency appreciation will happen quicker and faster.