TO THE POINT: Chinese markets are heating up despite attempts to cool them down. On March 18, the Chinese central bank raised the benchmark one-year interest rate by 0.27 percentage points, its first interest rate raise this year. While the mild push is meant to cool excessive liquidity in this over-heated market, the stock market continues to hit record highs. The Shanghai Composite Index stands firm at over 3,000 points after March 18, shrugging off expected drops resulting from the interest rate hike. Individual housing loans have seen little impact from rising interest rates due to the moderate nature of the rise. Housing prices continue to climb, especially in Shenzhen and Beijing, despite the Central Government’s numerous efforts to reign in the real estate market. Meanwhile, the Chinese Government is pushing Hong Kong- and New York-listed China Mobile to move back to the domestic A-share market this year, and other red chips are also being encouraged to return. Because of Chinese commitments to the WTO, four overseas banks incorporated locally in China are now allowed to operate renminbi business and competition in the banking sector could soon become cutthroat. One major Chinese cosmetics producer, Dabao, is seeking a merger, triggering interest from several international cosmetics giants.

Interest Rate Rise Boosts Confidence

As was widely expected, People’s Bank of China, the central bank, raised the benchmark one-year deposit interest rate by a moderate 0.27 percentage points to 2.79 percent, a bump that also increased the one-year lending rate to 6.39 percent. This year’s hike is the first seen in nearly seven months.

A 2.7-percent increase of the February consumer price index, as well as excessive bank loans and liquidity are believed to be the major factors behind the decision to raise rates.

In spite of the central bank’s move, the benchmark Shanghai Composite Index soared to 3,014 points the day after the interest rate announcement, second to the record high, and stayed over 3,000 points for a few days.

Qiu Yanying, chief analyst with TX Investment Consulting Co. Ltd., believes the interest rate raise is in response to accelerated growth within the Chinese stock market. Recently, the stock market had been experiencing sharp fluctuations due to expectations of an interest rate hike. However, Qiu believes the increase won’t exert a dramatic impact on the economy. “Now, investors can relax and keep investing as their jitters over a substantial interest rate hike are relieved,” said Qiu. “Even if the stock market falls, it still provides a strategic buying opportunity.”

This being said, as long as all investors believe in a structural bull market, the stock market will continue to rise in spite of whatever fiscal obstacles are used to keep it in line.