China raises rare earth export quota, EU not satisfied (Reuters)

BEIJING/SHANGHAI (Reuters) – China eased export curbs for rare earths on Thursday, restoring it to near-2010 levels in a bid to appease its trading partners, but the European Union said the measure did not go far enough to address concerns of stable supplies.

This year's second set of export quotas on the minerals made up for previous cuts and it came just a week after the World Trade Organization ruled against China's curbs on a different mix of raw materials, which some trade partners say could set a precedent.

"This is highly disappointing and the EU continues to encourage the Chinese authorities to revisit their export restrictions policy to ensure there is full, fair, predictable and non-discriminatory access to rare earth supplies as well as other raw materials for EU industries," EU trade spokesman John Clancy said in an emailed statement.

China, which accounts for around 97 percent of the world's rare earth output, has set the second batch of quotas at 15,738 tonnes, bringing the full year total to 30,184 tonnes.

The allocation has almost doubled from last year's second batch of export caps of 7,976 tonnes.

However, it is down a notch from 2010, when China limited exports of the 17 minerals crucial for global electronics production and the defense and renewable energy industries, to 30,258 tonnes.

"A first analysis of China's rare earth quota announced today shows that there is no noticeable change in the annual amount of rare earth China will allow to be exported to the EU," Clancy said.

China's policies on rare earths are closely tracked by companies and policy makers around the world, especially as suspicions have grown that Beijing was using quotas to give unfair advantages to its own producers.

The issue became a flash point late last year after China halted rare earth shipments to Japan during a diplomatic dispute, a move which worried its trade partners and underscored that Beijing was ready to use its monopoly as a political tool.

China slashed rare earth export quotas by 35 percent for the first half of 2011, choking off global supplies and causing prices to soar.

GOOD TIMING?

The announcement of the quotas coincided with China-EU trade talks in Beijing and comes just a week after the WTO ruled against China's export curbs on eight raw materials, such as bauxite, coke and magnesium.

Some have argued that ruling set a precedent on the legality of export curbs and led Europe and the United States to say China should also be forced to increase exports of rare earths.

At a briefing on Thursday, Chinese Commerce Minister Chen Deming did not mention the new quotas but sounded a note of confidence, telling reporters he was not concerned about any possible WTO challenge to Beijing's rare earths restrictions.

"The rare earth issue has not entered the WTO stage," Chen said during a joint briefing in Beijing with the visiting EU trade commissioner, Karel De Gucht.

"I am not worried because we have already had some negotiation (with the EU)," Chen said without elaborating.

At a later briefing, De Gucht said he was confident a negotiated solution could be achieved, but he added that China should publish such quotas further in advance of when they are imposed.

"The level of the quota is very important and also the predictability," he said. "What the industry needs is predictability."

ENVIRONMENTAL IMPACT

Following the WTO's earlier ruling, De Gucht had said the EU, the U.S. and Mexico could consider legal action if China failed to cooperate.

"On rare earths, what we have been saying is that we want to see applied to rare earth materials the principles that have guided the WTO panel when making the judgment on the raw materials case. We want the same rules to be applied," De Gucht told reporters after he and Chen read separate statements on the morning's trade negotiations.

China expressed its intention to appeal the WTO raw materials decision, De Gucht said, adding that the rules on trade in raw materials would be clear by year-end.

In its raw materials ruling, the WTO panel said China's domestic policies fell short of demonstrating that its export duties on the materials were to curtail pollution or conserve exhaustible natural resources.

China has taken steps to consolidate and rein in its polluting rare earths industry, which may bolster its case if the raw materials ruling is used as a precedent in a similar challenge.

Beijing has said claims by countries that its export curbs on rare earths threatened their economic and national security were "groundless," and that its quotas fell within WTO regulations.

But De Gucht said China, which produced 118,900 tonnes of rare earths in 2010, cannot use environmental protection as an excuse, especially if it has not putting limits on domestic use.

"It (production) has environmental ramifications. But if that affects the production to go on the exports, it should also go for the internal consumption," he said.

(Additional reporting by Aileen Wang in Beijing, Polly Yam in Hong Kong and Yuko Inoue in Tokyo; Writing by Jason Subler and Fayen Wong; Editing by Sanjeev Miglani)

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China raises interest rates amid inflation fight (AP)

BEIJING – China raised a key interest rate Wednesday for a third time this year as it tries to cool surging inflation.

The benchmark rate for one-year loans will be raised 0.25 percentage points to 6.56 percent, effective Thursday, the central bank announced. The rate paid on deposits will rise by a similar margin to 3.5 percent.

Inflation hit a 34-month high of 5.5 percent in May and is believed to have risen further in June even as an overheated economy cools gradually under the pressure of investment curbs and other controls.

The slowdown in some industries has prompted fears more interest rate hikes might trigger a sharp slump. But most analysts say the government should be able to avoid that.

"Benchmark lending rates are still low relative to the pace of economic growth," said Capital Economics analyst Mark Williams in a report.

Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power and can fuel unrest.

The Cabinet's planning agency says June inflation, due to be reported next week, is likely to exceed May's level due to a jump in food costs blamed on summer floods that damaged crops.

Private sector forecasters say June inflation could pass 6 percent. They say the mix of rapid growth and higher inflation means Beijing should further tighten access to credit.

Analysts blame the inflation spike on the dual pressures of rising consumer demand that is outstripping food supplies and a bank lending boom that was part of Beijing's response to the 2008 global crisis.

Beijing relies less than other major governments on interest rates to regulate the economy. Instead, it uses more targeted controls such as loan quotas while avoiding across-the-board rate hikes that push up borrowing costs for state companies.

The rate hike also will boost costs for local governments that borrowed from banks to pay for constructing highways and other public works. A government audit report last month said local governments have piled up 10.7 trillion yuan ($1.6 trillion) in debt and some can only pay their debts by borrowing more money.

The hike in deposit rates will help to reduce losses suffered by families that keep money in the bank, though the new level still is below inflation. Analysts say the gap has prompted some savers to divert money into speculating in real estate and stocks, fueling fears of a price boom and bust.

Factory production, bank lending and other economic indicators are easing but the World Bank is forecasting economic growth of 9.3 percent this year.

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Online:

People's Bank of China (in Chinese):

http://us.rd.yahoo.com/dailynews/ap/ap_on_bi_ge/storytext/as_china_interest_rates/42125847/SIG=10n04ukds/*http://www.pbc.gov.cn

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Instant view: China raises interest rates for 3rd time in 2011 (Reuters)

BEIJING (Reuters) – China's central bank increased interest rates for the third time this year on Wednesday, making clear that taming inflation is a top priority even when as the economy slows gently.

Benchmark one-year lending rates will be raised 25 basis points to 6.56 percent, and benchmark one-year deposit rates will be raised 25 basis points to 3.5 percent, the central bank said in a short statement on its website.

Following are analysts comments on the move:

DUAN JIHUA, ANALYST, SEALAND SECURITIES, SHANGHAI:

"The interest rate rise is within our expectation, which shows the CPI in June could be really high.

"There are still some uncertainties hanging over the Chinese economy, so monetary policy may enter a wait-and-see period in the future.

"The rate rise, which is highly expected, would not give the market a hard blow."

COLIN BRADBURY, DAIWA CAPITAL MARKETS' MANAGING DIRECTOR/REGIONAL CHIEF STRATEGIST, ASIA EX-JAPAN:

"There's a definite chance that the numbers will disappoint, in terms of the CPI. The market's view is that June will probably be the peak month for CPI. It obviously doesn't tell anything about the future, but potentially, that June could be a little bit disappointing for the market.

"Equally again, the consensus is that inflation will peak in June. The consensus is another 25 basis points rate hike in July. And that's what we have, don't think there's anything too sinister to read into it. The question now is 'is this the last rate hike?', which is what the market certainly believes.

"There's a chance of another sell-off in Chinese banks tomorrow. but we certainly believe, if you look at the valuation profiles of the banks at the moment, they really are historically very cheap. But certainly some of the longer term investors, they might see this as a buying opportunity with a 6 month view. They might see this as a good entry point."

MICHAEL JANSEN, ANALYST, JP MORGAN, LONDON:

"The rate rise is going to reaffirm to the market that the Chinese are into this one for the long haul. This is not a short term, 'inflation is licked' yesterday story, which is what the market was almost trading on. They have been raising rates every two months, but missed the window last week. That shows that there will be more restrictions going forward. The big risk-on rally might have hit a stumbling block or two."

LIGANG LIU, HEAD OF GREATER CHINA ECONOMICS, ANZ, HONG KONG:

"Today's rate hike suggests that China's June inflation could be higher than expected and the Q2 GDP remains solid, consistent with our expectation. The rate hike will help the PBOC to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system.

"Meanwhile, the rate hike will have an asymmetric impact: It will help depositors more than borrowers as the market lending rate has already been priced far higher than the current policy benchmark rate.

"In addition, the very high reserve requirement has already put the banking system at a significant disadvantaged position relative to non-banking financial institution(s), which could expand quickly by taking the advantage of the regulatory arbitrage. This will then set off new risks in China's financial system.

"Looking forward, we believe PBOC's rate hikes are not yet done. There will be a need of another rate hike in Q3 so as to better stabilize rising inflation and better anchor inflation expectations."

LI JIEMING, BOND ANALYST, SEALAND SECURITIES, SHENZHEN:

"This rate hike appears to be the last for this year as the economy shows signs of a slowdown.

"With global commodity prices dropping and the base effect waning in the second half of this year, inflation is likely to peak in June.

"As far as the domestic market is concerned, bond yields have nearly fully factored in the interest rate hike as talk of such a hike has lingered for more than a month.

"The medium- and long-term bond yields should only have a space of 3 to 5 basis points to rise."

MICHAEL WIDMER, METALS ANALYST, BANK OF AMERICA-MERRILL

LYNCH:

"That should have been priced in. The market did not react particularly well to it, but there was always scope for more tightening to come through in the 2H. There were comments recently from Chinese policy makers about inflation being the key concern, so I'm not surprised."

"Perhaps one of the hopes is that you're going to get less tightening in the second half...(but) I don't think this will (happen) so you will have headwinds. There is still upside left on copper, but it's not the most bullish of all markets. I think $10,000 again, but not $12,000."

KATHLEEN BROOKS, RESEARCH DIRECTOR UK, EMEA AT FOREX.COM:

"This move was to be expected. Inflation pressures continue to rise and the Chinese authorities have signaled their intention to quash price pressures. Thus we expect today's move to have a limited impact on markets in the short-term.

"However, in the long term, investors' may start to worry that China is tightening rates just as growth is slowing down. Signs suggest the pace of expansion in the Asian powerhouse is slowing."

PRIYA BALCHANDANI, OIL ANALYST, STANDARD CHARTERED BANK, SINGAPORE:

"The government is very keen on controlling inflation, but absolute demand in China is going to continue growing. Gas oil demand is still going to go up at a steady pace.

"We will see somewhat of a drop in oil prices, but after the initial period of news absorption, I would expect the market to come back with caution."

CARL FIRMAN, ANALYST, VM GROUP:

"China has done a number of reserve requirement increases over the last several months, however you have climbing inflation, so in real terms you are not making any money by just holding cash.

"A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances. Their money is not earning anything, in fact you are getting negative returns now holding cash, whereas you are not getting that holding gold.

"I think China would need to raise rates higher and higher still until we start to see some kind of tapering off of their inflation figures."

CHEN XINYI, COMMODITIES ANALYST, BARCLAYS CAPITAL, SINGAPORE:

"We did expect a interest rate hike in the near term and that had been factored in to our view of a slowdown in demand from China, so I do not expect a major impact on prices. The next key event to watch out for in China is the State Council meeting in July which will set the tone for monetary policy in the second half of the year."

FREDERIC NEUMANN, CO-HEAD OF ASIAN ECONOMIC RESEARCH AT HSBC HOLDINGS PLC IN HONG KONG:

"China's inflation battle is almost at an end. Already, there are signs that price pressures are coming off. Today's rate hike may therefore have been the last in the cycle.

"In general, given that the authorities decided to raise rates also shows their confidence in the local economy. Worries over a hard landing on the Mainland are overblown.

"While imbalances exist, growth should hold up in the near-term, and the policy shift, after many months of tightening, will likely shift into neutral shortly."

WANG JUN, ECONOMIST AT GOVERNMENT THINK-TANK CCIEE, BEIJING:

"This is good news for the market, which has anticipated this move. The possibility of another rise in the rest of the third quarter is not big. Inflation could peak soon.

"Whether there will be more interest rate rises in the rest of the year will depend on inflation, if inflation comes down, there will be no need to raise rates. But if prices rebound, there could be further rate rises.

"The government may put more stress on safeguarding economic growth. We have seen this message from recent remarks of Chinese leaders."

QIAO YONGYUAN, ANALYST AT CEBM, SHANGHAI:

"The interest rate rise is largely in line with market expectation, as most institutions expected one interest rate rise in July.

"The move is aiming to curb the quickening inflation, which may climb to as high as 6.2 percent in the year to June.

"I think this will not flag an end of the tightening measures and the central bank could raise interest rate once more for the reminder of the year.

"The government is paying attention to high prices of pork. In addition, other the costs of non-food items also keep rising, which could add more pressure to inflation in the coming months."

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China raises rates, shrugs off slowing growth (Reuters)

BEIJING (Reuters) – China raised interest rates for the third time this year on Wednesday, making clear that taming inflation remains a top priority even as the growth pace of its vast economy gently eases.

The 25-basis-point increase in lending and deposit rates underscored China's quiet confidence that the world's second-biggest economy is resilient enough to endure tighter monetary policy and is not threatened by the hard landing that some investors fear.

Analysts suggested China was close to, or even at the end, of a cycle of rate rises and the latest move was a pre-emptive strike before another big jump in inflation in data next week heightens depositors' worries about low yields.

"Today's rate hike suggests that China's June inflation could be higher than expected and the second-quarter GDP remains solid, consistent with our expectation," said Ligang Liu, head of Greater China economics at ANZ in Hong Kong.

"The rate hike will help the PBOC to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system."

The latest move increases China's benchmark one-year lending rate to 6.56 percent, and its benchmark one-year deposit rate to 3.5 percent, the central bank said.

The increases will take effect from Thursday, the central bank said in a short statement on its website.

Risky assets, particularly those with direct links to China's growth such as the Aussie dollar, sold off after the announcement, reacting to concerns this latest monetary tightening will choke an already sluggish global economy.

China-watchers couldn't agree on whether there will be more rate rises in the second half of the year. The People's Bank of China (PBOC) has raised banks' reserve requirements nine times in addition to these rate rises in its nine-month cycle of tightening monetary conditions.

"China's inflation battle is almost at an end. Already, there are signs that price pressures are coming off," said Frederic Neumann, an economist at HSBC in Hong Kong. "Today's rate hike may therefore have been the last in the cycle,"

GROWTH VERSUS INFLATION

Hopes that the PBOC may be near a pause in tightening was seen as a positive for stocks and could halt the rise in yuan onshore swap rates. Such expectations have helped the Shanghai Composite index bounce from nine-month lows hit in June.

The world's second-biggest economy expanded more than 10 percent last year but has cooled in 2011. First-quarter growth was 9.7 percent and data next week is expected to show the pace eased to 9.4 percent in the second quarter.

Evidence is growing that China's vast manufacturing sector is losing momentum, due both to tighter policy at home and slowing demand overseas.

A survey of purchasing managers showed the factory sector expanded at its weakest pace in 28 months in June, mainly owing to a drop in new orders. Many analysts reckon the pace is in keeping with an economy expanding on average at around 9 percent and industrial growth of around 13 percent.

Moreover, a double-digit increase in wages is expected to feed into already strong domestic demand.

With U.S. interest rates near zero, Beijing worries it might attract more speculative funds into China if it raises rates too far. That would exacerbate the problem of excess liquidity and further fuel inflation.

Equally, it has to placate depositors struggling with a negative real rate of return on their cash in banks.

China's inflation quickened to a 34-month high of 5.5 percent in May as elevated food prices and a red-hot property market kept price pressures alive.

A Reuters poll forecast data due on July 15 will show that inflation in June rose to 6.3 percent -- its highest reading since mid-2008. Many economists estimate inflation will peak in June or July.

Beijing is especially sensitive to rising prices that might stir social unrest and threaten its leadership.

Wang Jun, an economist at CCIEE, a government think tank, said Beijing may feel compelled to raise rates again if inflation, proves more stubborn than expected.

"If inflation comes down, there will be no need to raise rates. But if prices rebound, there could be further rate rises," he said.

(Writing by Koh Gui Qing and Vidya Ranganathan; Editing by Ruth Pitchford and Neil Fullick)

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