Li Keqiang's inflation tightrope
Incoming premier Li Keqiang must walk a fine line between bad debt and price rises after he takes over responsibility for monetary policy
Inflation concerns have prompted swap traders to scrap bets Li Keqiang will ease monetary policy after he is appointed as the next premier at a Communist Party congress starting today.
The cost to lock in the three-month Shanghai interbank offered rate for a year rose 25 basis points in the past month to 3.76 per cent, four basis points above the benchmark floating rate after trading below it for 18 months. The yield on the June 2013 bonds of China Construction Bank Corp, the nation's second-biggest lender, climbed 15 basis points last quarter to 3.68 per cent. Globally, financial companies pay an average 2.72 per cent, according to Bank of America Merrill Lynch indexes.
The pessimism of traders in Shanghai is at odds with global banks including HSBC, which wrote this month that there is "little doubt" the country's new leaders will gear up stimulus for the world's second-biggest economy during the transition.
Li needs to balance the risks of rising bad loans with inflation forecast to reach 3.4 per cent in the third quarter of next year, up from 1.9 per cent in September, according to economists in a survey.
"Borrowing costs for companies and between banks may rise because inflation will go up and liquidity won't be as abundant," said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities, a brokerage and underwriting company.
"There are a lot of uncertainties for policymakers to weigh next year. They don't want to loosen further to stir up inflation but neither should they tighten too much to hurt the economy."
