In response to the rapid pace of growth in the world’s fastest growing economy, the People’s Bank of China raised interest rates by 27 basis points. Bringing the benchmark lending rate to an eight year high of 6.84 percent, policy makers additionally increased the deposit rate to 3.33 while cutting the tax on interest income, hoping to promote savings. The tax rate will incidentally drop to 5 percent from 20 percent beginning August 15th. Already expected by the market, the decision will, however, likely do nothing in denting the current pace of economic growth as money continues to pour into China, especially the stock market. For the year, with speculation on the bid side running rampant, the benchmark index has risen 95 percent after more than doubling returns in the previous year. Subsequently, the gains have supported higher consumer and business spending, driving economic growth to the fastest in 12 years. Ultimately, the market should expect further tightening measures (if they are to come) in the near term with the proposal of a more flexible currency regime still on the back burner. With the decision widely digested by the equity markets already, the currency was taken back a bit in the overnight session, falling to 7.5740 against the US dollar as well as the Euro and the British pound. Incidentally, there was some speculation that had surfaced over a potential intervention by the PBoC, helping the Chinese yuan to drop in dramatic fashion.



Consumer Prices Rise In Hong Kong
Inflation accelerated in the Hong Kong economy for the first time in three months in June according to government reports. Attributed to the increase at the consumer level were pork prices, sparked by a short supply and rising demand, following the trend in mainland China. For the record, prices rose 1.3 percent in the annualized comparison following a 1.2 percent in the month of May. Helping to mitigate any real rise in prices seems to be the currently running government waiver on property rates for the quarter. However, removing the waiver, prices increased in several subcomponents, with the largest difference seen in food prices which advanced by 4.5 percent. Subsequently, near term reports will ultimately reflect further acceleration in prices, in closer relation to the 11.3 percent advance in food prices witnessed in China. For now, traders seem to be siding with a softer outlook as inflationary pressures are in check, lending support for the Hong Kong dollar which is higher at 7.8203.

Asian Stocks Climb, PBoC Decision Fully Priced
It seems that equity traders, fully aware of the recent Chinese economic growth report, digested the news and bid stock markets higher on the day. Not even flinching on the notion of higher borrowing costs, equity investors bid the Shanghai index higher, lending support for regional equity benchmarks in Hong Kong and Singapore. Stocks in Hong Kong advanced, supporting a record close on the Hang Seng as Ping An Insurance led insurance sector buyers on the day. Cnooc shares also received a boost as crude oil contracts traded through $76 a barrel in the overnight. When it was all said and done, the Index was able to add 275.70 points to 23,291.90. Singapore’s stocks comparatively made gains on the day, supported by oil service companies like Keppel Corp. Shares in the world’s largest builder of oil rigs added 2.3 percent to close at S$13.50, helping to bolster the sector. Additionally with property stocks on the run, the Straits Times Index was able to close at 3,651.38, higher by 47.76 points.

Richard Lee is a Currency Strategist at FXCM.