China's benchmark stock CSI 300 Index slid 4.7 percent from a record yesterday on speculation rapid growth would prompt the government to raise borrowing costs. The index has gained 28 percent since Feb. 27 when its 9 percent slump triggered a global stock market rout.

House Prices

"It will take more than one imminent 27 basis point hike to puncture equities sentiment on the Chinese street," Stephen Green, senior economist at Standard Chartered Bank Plc said in a note. "If that wealth effect spills out of the stock market, then get ready for accelerating house prices in Shanghai and beyond."

Green expects two 27 basis point interest rate increases this year, one as soon as this month.

Li Xiaochao, spokesman for the national statistics bureau, said at the press conference to announce gross domestic product that the government will pursue policy tightening "more moderately, but more frequently."

"We like this phrase as it underscores that policy tightening is also likely to spook financial markets more frequently and produce periodic sell-offs," Ben Simpfendorfer, an economist at Royal Bank of Scotland Plc. in Hong Kong said in a note on the GDP titled "China -- Not a Panic Number."

Inflation

Inflation accelerated 3.3 percent in March, the fastest pace in more than two years and breached the central bank's 3 percent target for 2007. Of the 2.7 percent increase in CPI for the quarter 1.5 percentage points was because of rising food prices, the statistics bureau said yesterday.

Higher interest rates may have some effect on stock prices. Households and companies have been shifting their savings to the stock market as inflation above the one-year benchmark deposit rate of 2.79 makes returns negative.

The deposit rate will be raised at least once this year, according to 13 economists surveyed.

"The main reason to increase interest rates is bring deposit rates to positive level and to drag money back from the stock market to bank deposits," said Paul Cavey, an economist at Macquarie Securities in Hong Kong.

Lending curbs have had limited effect on investment because about 60 percent is funded from companies' own resources, according to Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

Industrial Profits

Profits at Chinese industrial companies surged 43.8 percent in the first two months of 2007.

"To really cool the economy they need to cool profits," said Maguire. "The easiest way to do that is allow yuan appreciation --China's goods become more expensive and profit margins start to get squeezed."

The yuan yesterday rose 0.07 percent to 7.7165 against the dollar, the highest close since a fixed exchange rate to the dollar was scrapped on July 21, 2005. The central bank has allowed the yuan to gain 7.3 percent since then.

Goldman Sachs Group Inc. yesterday forecast the currency will gain 9 percent to 7.03 per dollar.

 China Interest Rates
 ---------------------------------------------------------
 Lending Deposit Reserve GDP
 rate rate Req. Ratio 2007
 ---------------------------------------------------------
 Median n/a n/a n/a 10.4%
 Average n/a n/a n/a 10.3%
 High n/a n/a n/a 10.8%
 Low n/a n/a n/a 9.8%
 Number of Estimates 13 13 11 11
 ---------------------------------------------------------
 Action Economics 2x 2x 3x 10.4%
 Bank of East Asia 3x 3x -- 10.2%
 CFC Seymour 1x 1x 2x 10.2%
 Citic Securities 1-2x 1x 3x 10.6%
 Core Pacific-Yamaichi 2x 3x 2x 9.8%
 DBS Group 2x 1x 3x --
 Forecast Ltd. 2x 2x 3x 10.0%
 JPMorgan Chase # 1x 1x 1x 10.8%
 Lehman Brothers 1x 1x -- --
 Royal Bank of Scotland 2x 1x 2x 10.5%
 Societe Generale 2x 4x 3x 10.5%
 Standard Chartered Bank 2x 2x 3x 10.6%
 UOB Group 1x 1x 3x 10.0%
 ---------------------------------------------------------
 Note: # refers to forecasts by end of 2Q 2007

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