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Analysts: Higher Chinese interest rates no magnet for „hot money”

China’s latest interest rate hike would have no easily quantifiable impact on the influx of so-called „hot money” as such funds would not be deposited in banks simply to earn higher rates, Dr. Ou Minggang, deputy chief editor of the Chinese Banker magazine, told Xinhua on Friday.

Rather, analysts said, funds were likely to be attracted into China by an anticipated appreciation of the yuan and continued gains in the equity and real estate markets. „Hot money” refers to short-term capital flows that move from market to market, seeking the highest returns. The People’s Bank of China (PBOC), the central bank, announced on Thursday that it would raise the one-year deposit interest rate by 27 basis points to 4.14% and the lending rate by 18 basis points to 7.47%, effective on Friday. This rate hike was China’s sixth this year, part of a series of moves to ease inflation pressure, as the economy is expected to expand 11.5% for the full year.

Meanwhile, last week, the US Federal Reserve sliced a key interest rate by 25 basis points to 4.25%, the third reduction in three months, in an effort to prevent a recession. There are market rumors that, as Chinese and US rates converge, more „hot money” will flow into China as some investors bet on the appreciation of the Chinese currency. But that isn’t the government’s main concern, analysts said. „The key concern for the central government is to cool off the red-hot economy, not the influx of hot money from overseas and foreign exchange problems,” said Tang Min, deputy secretary-general of the China Development Research Foundation.

China’s consumer price index (CPI), the key inflation indicator, surged to an 11-year high of 6.9% in November, mainly driven by soaring food prices. Any fund inflow would be „targeted at the financial markets including the surging stock market and the real estate market,” said Ou, adding that the country would attract the inflow of hot money betting on the appreciation of the yuan. Market observers predicted that next year the Chinese currency would appreciate by more than 8%. The Renminbi, which stood at 7.3572 to one US dollar on Friday, has appreciated about 11% since China depegged it from the US dollar in July 2005. China has taken a series of measures to cool off the economy, including increasing interest rates, encouraging domestic consumption, and better managing the property and stock markets. (