Central bank targets inflation
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The rate hike will not affect China's stock market very much because investors, after weeks of uneasiness about such rumors, can now sigh with a relief that it is mild. And the hike is actually good news for the stock market because it means the economic fundamentals are getting better and industrial performance is improving.
As the top State organ in charge of the country's monetary policy, the People's Bank of China should put how to curb soaring prices and real estate bubbles firmly at the top of its agenda.
Despite encountering a new round of rigid macro-regulatory measures from the central government over the past months, domestic house prices have stood very firm and there is still a possibility of further rises if no effective measures are taken. Any rebound in prices will increase the difficulties facing the central government in regulating the long-controversial sector next year.
The over-fast growth of the domestic real estate market has been the result of the country's unusual monetary policy since the start of the global financial crisis. The latest rate hike indicates the central bank's resolve to restore the emergency monetary policy to normal and bring the red-hot real estate market back onto the track of healthy development.
Despite being downplayed by some, a 0.25 percent increase in interest rates will play an inestimable influence on the real estate market. It will not only increase speculation costs in this sector, it will also change investor expectations of the future market. Any fundamental changes in investor expectations will change the trend of China's speculation-prone real estate sector.
More importantly, the latest rate hike is expected to produce an accumulated effect on the domestic real estate market, one that heavily depends on credit. For a real estate market in which the down payment practice is widely applied, any rate hikes will increase the cost of borrowing and thus deter some from entering the market.
The interest rate hike indicates that the central bank's "prudent" monetary policy will be fully implemented by not only controlling credits but also by readjusting interest rates. These will have a relatively big impact on the domestic real estate market.
The market should not underestimate the potency of the prudent monetary policy.
The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
