Interest rate hikes alone will not curb excessive liquidity

Interest rates alone will not curb the excessive liquidity caused by people switching from long-term to short-term deposits, the South China Morning Post reported. In response to the recent market craze, people have poured billions into the stock market while deposits in domestic banks decreased in April to US$21.80 billion, the second monthly drop in six years, state media reported. Two-thirds of the money pumped into the stock market came from individuals, mostly through cash transfers, while the rest was from institutions. Despite former US central bank chief Alan Greenspan warning of the stock market's instability late last week and the central bank most recent interest rate increase on May 19 of one-year deposit and loan interest rates, investor confidence remains undeterred. According to Yan Li at Chinalion Securities in Beijing, investors may take negative news as a sign they can buy into the market more cheaply, resulting in no market impact when the central bank increases interest rates.