Two Steps Back, One Step Forward

The People's Bank of China said on its Web site late Friday that it will raise the benchmark lending and deposit rates by 18 basis points and 27 basis points respectively. This will be in addition to another 50-basis-point rise in the reserve requirement for banks. The PBOC also announced the widening of the yuan trading band from 0.3 percent to 0.5 percent against the US dollar.

Now it appears the PBOC is getting serious trying to halt the China stockmarkets. However, the widening of the appreciation band for the yuan will actually provide good support. PBOC had to do something with the yuan as there is a big visit to Washington this week by some Chinese big wigs. This is to provide some solace for Paulson to pacify the threats of American lawmakers. The rumblings are that there will be more tough questions asked during the visit. Unfortunately by allowing the yuan to gain more ground, it stokes the stockmarkets in China even more (currency gains in outlook).

Finally PBOC is doin something with its deposit rates, it is still too low vis-a-vis the lending rates. Deposit rates need to go up even more aggressively so that it can present as aviable counterbalance to soak up speculative funds.

Initially we may see a drop in the China markets but it is difficult to envision a dramatic correction as the yuan issue will perk up bottom fishers.