China's Interest Rate Hike Works for Consumption

 |  Includes: BIDU, CYB, SINA, SOHU
by: Emerging Money

By Tim Seymour

The People’s Bank of China just raised commercial banks’ benchmark deposit and lending rates by 25 basis points. Expect more targeted moves like this from Beijing.

Inflation may have taken a pause here, but many economists widely expect it to pick up in the second half. Luckily, the PBOC now has a few bullets in the gun to fire against price pressures.

In terms of rate action, we expect another interest rate increase by June. Remember that deposit rates are less important to Beijing than lending rates, so you may see less pressure on the consumer in the next phase.

Yuan appreciation should not be overlooked here, either. But Beijing will do this on its terms and not on any basis imposed by the U.S. or other foreign monetary authorities.

Watch the impact on yuan funds like CYB.

In fact, reserve requirement hikes and outright interest rate moves seem to be working to curb inflation while giving Chinese consumers a shot in the arm by making the yuan effectively stronger in terms of its buying power.

This is a rate hike but also effectively a tax cut. Note the movement in names like Sina Corp., SINA,, Inc., BIDU and Inc. SOHU lately.

The Chinese Internet space is directly exposed to this effective consumption increase, and these stocks are alive and well.