China Stocks, Bonds Fall on Rate Increase Concern; Yuan Rises By Christina Soon and Jianguo Jiang
April 19 (Bloomberg) -- China's stocks and bonds slumped and the yuan climbed on speculation a government report today will show the economy is growing fast enough to force the central bank to raise interest rates. The government will probably report today that gross domestic product expanded more than 10 percent for a fifth straight quarter in the three months ended March 31, according to a Bloomberg News survey of economists. China has increased borrowing costs to cool the world's fastest-growing major economy and curb inflation. ``The market is concerned that the GDP and other economic figures will be stronger than expected and prompt the government to raise interest rates,'' said Zhang Ling, who manages the equivalent of $1.1 billion at ICBC Credit Suisse Asset Management Co. in Beijing. ``That's providing a good excuse to sell shares in a market that has risen so much.'' The benchmark CSI 300 Index, which tracks yuan- denominated shares listed on China's two exchanges, dropped 88.25, or 2.7 percent, to 3216.25 as of 11:30 a.m. local time, set for the biggest decline since March 1. The gauge had risen 62 percent this year as of yesterday. The currency rose as high as 7.7179 against the dollar from 7.7218, according to the China Foreign Exchange Trade System. The central bank has allowed the yuan to gain 7.2 percent since the fixed exchange rate was scrapped on July 21, 2005, seeking to curb a trade surplus that has driven growth in the economy. Delayed Announcement Gross domestic product expanded 10.4 percent from a year earlier, according to the median estimate of 24 economists surveyed by Bloomberg News, the same pace as in the fourth quarter. The statistics bureau will release the figures at 3 p.m. in Beijing, later than usual, adding to speculation that the number may be higher than expected. ``It sounds logical that the yuan keeps strengthening,'' said Philippe Gernez, regional head of currencies and derivatives in Singapore at Natixis. ``The dollar has been very weak and the GDP data is expected to be very strong. There are also rumors of another rate increase.'' The yuan may rise to 7.6 by the end of June, said Gernez from the French asset management and investment bank. A rising yuan will curb export earnings, which have added to excess cash in the financial system and made it difficult for the government to slow economic growth. The central bank on April 5 boosted the reserve requirement ratio for the sixth time in less than a year and increased interest rates for the third time in 11 months on March 18. Bonds Slump Bonds slumped, pushing the yield on the benchmark three- year bond up 5 basis points, or 0.05 percentage point, to 2.86 percent, the highest since Feb. 14 last year, according to China interbank bond market. The price of the 2.66 percent security maturing in February 2010 fell 0.14, or 1.4 yuan per 1,000 yuan face amount, to 99.45. ``Few investors are keen to buy bonds at this sensitive time,'' said Wang Haoyu, a bond trader at First Capital Securities Co. in the southern Chinese city of Shenzhen. ``The report may show strong growth.'' China's consumer price index, a key indicator for inflation, accelerated to 3.3 percent last month, the China Securities Journal reported on April 10, citing unidentified people. The median estimate in a survey by Bloomberg News is 2.7 percent. Consumer prices rose 2.7 percent in February from a year earlier after gaining 2.2 percent in January. ``This reinforces our suspicion that the first-quarter figures will be torrid,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. If today's inflation number is higher than expected, ``the bank could raise interest rates as soon as tonight,'' he said. Higher Rates Higher interest rates slow economic growth and curb corporate earnings by raising borrowing costs. Property companies led the decline in stocks. China Vanke Co., the nation's biggest developer, slid 0.95 yuan, or 5.1 percent, to 17.81. Citic Securities Co., China's biggest publicly traded brokerage, dropped 1.57 yuan, or 3.2 percent, to 47.90. To contact the reporter on this story: Christina Soon in Beijing at [EMAIL PROTECTED] . Last Updated: April 19, 2007 00:03 EDT -- [EMAIL PROTECTED]
