China's sudden interest rate hike reverberated throughout global markets Tuesday, driving down stock prices and touching off fresh concerns about how new attempts to slow down the world's second-largest economy would affect the rest of the world. As a result of the hike, China's benchmark one-year lending and one-year deposit rates have each increased by 25 basis points.
The goal of the rate change is to temper the growth in China of real estate prices and inflation. More broadly, it could help slow the overall tempo in an economy that many believe is expanding too quickly for its own good. This is hardly Beijing's only attempt to control growth, and recent indicators have shown some success on that front. On Thursday, new GDP numbers showed that the Chinese economy grew by 9.6 percent between July and September compared with the same period a year ago. That's down from the 10.3 percent rate of expansion in the previous three months.
While it will be a few months before new GDP numbers capture the impact of the rate increase, a number of the new policy's impacts are already clear. Here's a look at what the hike means and who the winners and losers will be.
Chinese savers (Winners). In China, inflation has been steadily eating away at money in bank accounts. Before Tuesday's announcement by the People's Bank of China, the one-year deposit rate was 2.25 percent. By comparison, the inflation rate in China currently sits at about 3.6 percent. That means savers have been effectively accepting losses by keeping their money in banks. That will still be the case after the hike, which will push the one-year deposit rate up to 2.5 percent. In other words, while Chinese savers will still be taking a hit, it will be a slightly less painful one.
Chinese banks (Winners). Chinese banks like higher interest rates since they can now make more money off of their loans. The one-year lending rate has been increased by a quarter of a point to 5.56 percent, and that bump will help boost banks' bottom lines. "It seems to us that the policy tide has turned in favor of the banks after battering them for about a year," Credit Suisse Group AG analysts Sanjay Jain and Daisy Wu wrote in a research note. "Chinese banks are extremely attractive on valuations."
The rest of the world (Neutral). China's breakneck growth has boosted economies throughout the globe. As much of the rest of the world struggles to regain its footing, the burgeoning Chinese consumer base has stepped in to help keep companies, and even entire countries, on firm footing. And since the rate increase is a tightening move aimed at keeping growth in check, the rest of the world is looking on intently to see how much the new policy will slow down China's economy. To be sure, this hike, combined with the new GDP numbers, reaffirms Beijing's commitment to stepping on the brakes, but experts caution that unless several more rounds of increases follow, any slowdown is likely to be minor. "A 25 basis point increase isn't going to make [much of a] difference on the economy," says James Oberweis, a comanager of the Oberweis China Opportunities mutual fund. "I don't think you're going to see significantly slower growth, particularly not from a 25 basis point change ... It's a rounding error."
The renminbi (Neutral). The United States has widely criticized China for artificially depressing the value of its currency, the renminbi. By keeping the renminbi low against the dollar, China has effectively propped up its exporters by making their products cheap for Americans to buy. In June, though, Beijing signaled that it would start allowing the renminbi to appreciate against the dollar. Since then, its rise has been quite modest; the renminbi has gained only about 3 percent against the greenback. Onlookers have been vigorously debating what the rate hike may mean for currency reform, but the reality is that the increase in rates gives away relatively little about the future of China's monetary policies. "I think it's [mostly] unrelated to the renminbi policy," says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. In other words, the consensus view remains the same: Over the short term, significant appreciation isn't very likely.