China has raised lending rates of banks by 25 bp and time depositrates by 25-34 bp (3M by 34 bp, 6M by 30 bp, 1Y by 25 bp, 2-3Yby 30 bp) while demand deposit rates have been left unchanged.

    This was the second rate hike in this cycle.

    Our economists had expected one rate action by the year-end,and they expect further hikes of 185 bp in lending rates and up to200 bp in deposit rates by end-2011.

    We estimate the current move to be positive for bank margins byan average of 3 bp, albeit less than the first rate hike on 19October (3-6 month deposit rates and one-year lending rates wereboth lifted by 25 bp). The smaller banks (CMB, Minsheng) benefitthe most followed by ABC and CCB among the large ones.

    This is a sweet spot for banks – rate hikes add to margins whilenot really hurting GDP growth as yet. With rights issues over,rate-related uncertainty diminishing, and clarity emerging onLGFV loan-related provisioning, we remain OVERWEIGHT largebanks.

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