China Boosts Interest Rates, Possible Negative For U.S. Ag

Doane Agricultural Services posted the following item on our content site today:

8/18/2006 -- China announced an increase in interest rates on Friday. This is the second rate increase in four months. With the 0.27 percent increase, deposit rates moved to 2.52 percent and lending rates climbed to 6.12 percent. The move follows news that China's economy grew at over 11 percent in the second quarter of this year and 10 percent the previous quarter. Chinese officials are boosting ratings in an attempt to cool the fast pace of investment growth in the country. It's feared huge capital inflows and the strong economic growth could spark inflation and undermine the highly leveraged banking system. The government is also pursuing a tightening policy through higher bank reserve requirements.

Higher interest rates are also expected to strength China's currency, the yuan. The yuan has increased very little since it was depegged against the dollar just over a year ago. The higher currency value should help curb China's huge trade imbalances. The impact of these moves on U.S. agriculture is potentially a bit negative. To the extent China's economy slows, it could reduce import demand for cotton and soybeans from the U.S and perhaps delay to point at which China becomes a net corn importer. The concern is not the small increase in rates announced Friday, but that further tightening may be ahead, and China's economy could slow faster than intended.

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