Asia Markets: China talks down inflation after rate hike

By Michael Kitchen, MarketWatch

LOS ANGELES (MarketWatch) — Speaking one day after a surprise interest-rate hike, Chinese Premier Wen Jiabao said Beijing is confident that inflation is under control and that the public should be confident too.

Reuters
Headquarters of the People's Bank of China in Beijing.

Appearing Sunday on a radio call-in show for China National Radio, Wen warned a listener that “inflation expectations are more dire than inflation itself,” according to a report from the state-run Xinhua news agency.

Even after November’s consumer price index inflated at a 28-month-record-high rate of 5.1% from a year earlier, Wen urged people to remain confident and as government agencies act to stabilize prices, according to Xinhua.

Wen pointed to food and real-estate prices as major drivers of inflation, with agricultural prices of particular concern.

“The fundamental way to stabilize prices is to achieve a balance of supply and demand, which requires continuous development of agriculture,” Wen was quoted as saying.

As for China’s soaring property prices, he said, according to Xinhua: “In an interview last year, I had promised to maintain housing prices at a reasonable level in my term. I will not hold back but [will] continue working hard to realize this goal.”

The People’s Bank of China issued a statement Saturday on its website announcing the quarter-point interest-rate increases to both its one-year lending and one-year deposit rates.

The move, which went into effect Sunday, brought the lending rate to 5.81% and the deposit rate to 2.75%.

While many analysts had expected the central bank to raise its interest rates sometime in the coming months, the timing came as a surprise.

However, PBOC monetary-policy-committee member Li Daokui was cited in a separate state-media report as saying the choice of Christmas for the announcement was no accident.

Li said the holiday was “the right time” for the rate increase, since with Western financial markets closed, China would be able to avoid overreaction to the decision.

While Hong Kong’s stock market was closed Monday for a holiday, shares on the Shanghai Stock Exchange largely shrugged off the central bank’s hike, as a rally in insurers and some resource shares led the market solidly higher.

The Shanghai Composite /quotes/comstock/16k!i:000001 (CN:SHCOMP 2,835, -0.21, -0.01%)   added 0.7% in the morning session to trade at 2,854.90, with insurers among the gaining stocks.

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