By Cho Hyung-kwon
Staff Reporter


China’s interest rate hike is expected to weigh on the domestic financial markets in the short-term as demand could slow from Korea’s largest trading partner, hurting export growth, analysts said Friday.

But in the long-term, the impact could be neutral as commodity and oil prices may decline, lifting concerns about inflationary pressure, they added.

On Thursday, the People’s Bank of China raised the benchmark one-year bank deposit and lending rates by 27 basis points each to 5.5 percent and 2.25 percent.

It is the first rate hike in nine years and is viewed as the Chinese government’s strong initiatives to cool down its fast growing economy at a measured pace, following the release of its GDP data last week.

``Despite signs that the Chinese economy is experiencing a modest slowdown, reflected in the 9.1 percent third-quarter economic growth, a fall from 9.6 percent in the second, the rate hike shows that authorities are confident of achieving a soft landing,” said Kim Sung-joo, an analyst at Daewoo Securities.

``But the interest rate hike will dampen investor sentiment on the stock market as the export momentum could be slowed faster than expected,” he added.

Total export growth in September slowed to 22.7 percent compared to a year ago and China-bound export growth has also fallen to 27.1 percent, the lowest in since June, 2002.

``Also, with the won-dollar exchange rate falling to its lowest level in four years, the tightening measure in China could hurt domestic exports, which has been the sole driver of economic growth,” Kim said.

Hyundai Securities said that the domestic economy could remain sluggish for the time being as export growth is likely to take a direct hit from the interest rate hike.

The brokerage firm said that concerns that exports will slow down could further dampen consumer sentiment and capital expenditure of businesses, putting more pressure on the domestic economy.

Hanwha Securities believed that the rate hike will be a negative for both the Chinese and Korean stock markets because of the uncertainty in the authorities’ decision making process.

``Since June, the People’s Bank of China denied the possibility of a rate hike in four occasions. This raises doubts about the credibility of their policies,” said Hong Chun-wook, an economist at Hanwha.

``The rate hike increases risks of a harder landing of China’s economy with slowing import growth already pointing to sharply decelerating investment activity,” said Pieter Van Der Schaft from Barclays Capital, in a report.

``For the longer-term, China’s rate hike represents a constructive recognition that investment activity hasn’t slowed enough. However, in the near-term, the move is likely to slow aggregate demand, primarily in the investment component of gross domestic product,” Michael Kurtz, an economist at Bear Stearns Asia in Hong Kong, said in a report.

``It represents an intensification of China’s policy-driven slowdown that likely will further curtail demand for investment-driven basic materials and producer goods such as steel, cement and plastics,” he added.

Kurtz expected another rate hike by the central bank in the coming months as real interest rates still remain below zero.

But in the long-term, most analysts said the impact of the interest rate hike would not have serious consequences and some said that it could help Korea achieve a balanced growth between exports and domestic demand.

``The interest rate hike in China is not surprising and it is a good thing because it could have led to problems down the track. But commodity prices may fall, which will help the earnings margin of Korean companies,” said Andrew Fay, chief investment officer at Deutsche Asset Management Group, during a press briefing yesterday.

``For Korea, the rate hike will not be significant because the U.S. will have a greater impact on Korea, so it will be important to see how the U.S. trades are affected going forward,” he added.

Hyundai Securities said that measures to boost the domestic economy and the possibility of a decline in oil prices will have a positive impact in the second half of 2005.

``In the long term perspective, additional call rate cuts by the Bank of Korea are most likely if exports show signs of contraction. This could help consumer sentiment and domestic demand to recover,” it said.

``The decision to hike rates by China should not come as a shock. We have just come through a period in which global growth was historically rapid, and China was the strongest component,” said Larry Kantor, head of economics at Barclays.

``China’s growth seems to have slowed somewhat since the extraordinarily rapid pace at the start of the year, but clearly not enough to satisfy Chinese authorities. The hike of about 25 basis points is a small move and so we should be cautious about extrapolating large market moves in its wake,” Kantor added.

``As far as other markets are concerned, they will be affected only in as much as this move succeeds in slowing global growth. This will be difficult to determine by watching near-term market reaction,” he noted.

kevincho@koreatimes.co.kr