China stocks defy interest rate hike

CHINA / National

China stocks defy interest rate hike

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-07-23 15:30

An investor flashes a sign of victory in this photo taken on July 20,
2007. [newsphoto]

Chinese stocks rose nearly four percent on Monday in spite of an interest
rates hike and a reduction on income tax on bank deposits.

The benchmark Shanghai Composite Index opened 0.81 percent higher at
4,091.24 and finished the day at 4,213.36, an increase of 3.81 percent
from Friday's close.

Only about ten about of more than 1,300 A-shares posted losses in the
Shanghai and Shenzhen stock exchanges.

Steel stocks were especially strong, with about 20 steel shares jumping
their daily limit of 10 percent, including Baoshan Iron & Steel and
Beijing Shougang.

In the auto sector, FAW Car Co. Ltd., Zhongtong Bus and Tianjin FAW Xiali
went up their 10 percent limit.

The financial sector also staged strong performances. CITIC Securities
soared 7.04 percent to close at 62.07 yuan per share. The Industrial and
Commercial Bank of China rose 2.68 percent to 5.75 yuan, while Bank of
China went up 2.27 percent to 5.41 yuan.

That rise came after the central bank raised one-year deposit rate by
0.27 percent to 3.33, and one-year lending rate by the same amount to
6.84 percent to prevent the economy from overheating.

The monetary tightening was a response to a series of economic figures
which indicated Chinese economy is heading towards overheating. Gross
Domestic Product expanded by 11.9 percent in the second quarter and by
11.5 percent for the first half of the year.

Inflation is also accelerating. Consumer Price Index grew 4.4 percent in
June and 3.2 percent for the first half of the year, above the central
bank's target of 3.0 percent for the whole year.

Coupled with the interest rates increase, the State Council cut the
interest income tax to five percent from 20 percent.

General speaking, interest rates hike have negative effects on the stock
market as it increases companies' borrowing cost, thus eroding their
profits, and it makes deposits more attractive, drawing some funds away
from the equity market.

However, analysts believe the market had been expecting the rates hike
and tax cut for some time and had absorbed the negative influences.

Shenyin Wanguo Securities analysts said a great amount of outside capital
entered the market as investors foresaw no more negative news in the near
future, pushing up the prices.

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