As food prices (on pork and vegetables) and commodity prices (on fuel) rise once again in China, there is a high probability that Beijing will increase rates amid an already troubled economy, said several economists surveyed by Bloomberg. Market prices is expected to have risen 6.3% in October, after a 6.2% gain in September. August's 6.5% inflation was a decade high. Currently, the rate of inflation is higher than the rate of return from bank deposits, hence investors seek equity and real estate as means of esclating their returns, a dangerous direction for the Chinese economy.
The Hang Seng Index, Hong Kong's benchmark index, opens significantly lower on Monday (more than 1,200 points down by midday) largely due to three factors: 1. Indefinite postponement of the QDII scheme, which allows mainland investors to inject money into Hong Kong's open financial markets; 2. Renewed worries in New York over the credit crisis, as top investment banks Merrill Lynch and Citigroup force out senior management due to bad debts; and 3. Inflation in China is expected to increase by over 6% once again, as mentioned above, leading to yet another anticipated increase in bank rates, the 6th time this year.
Also, over the weekend China's central bank increased bank reserve requirements, the 9th time this year to 13.5%, from 13.0%, effective November 26th. Many financials, including China Merchants Bank, which plans to open a branch in New York, will experience negative pressure on its earnings from the new reserve requirements. Furthermore, HSBC Holdings, the largest commerical bank in Hong Kong and a key component of the Hang Seng Index, is expected to announce a $1 billion loss from its US mortgage operations.
All these announcements came as the largest banks in Hong Kong, HSBC Holding's unit bank Hang Seng Bank, Bank of East Asia, Standard Chartered Bank and Bank of China reduced loans rates for the second time in over a week, to 7.0% from 7.25%, led by HSBC Holdings. The three-month HIBOR (Hong Kong Interbank Offered Rate) fell to 3.38% from 3.48%, as the Hong Kong Monetary Authority (HKMA) cut rates in line with the Federal Reserve. Weakening US dollar gave hope of HKMA cutting Hong Kong dollar's peg, thereby exerting downward pressure on the HIBOR. As a result, HKMA had to sell 9.4 billion Hong Kong dollars last week to defend the peg.
Anyone see further weakening in equity and currency markets?
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