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China's rate hike hints at urgency, analysts say

China's latest interest rate hike is only a first step as regulators show signs of increasing urgency in trying to slow the pace of growth in Asia's second-largest economy, analysts said yesterday.

It was the third time in a year the People's Bank of China had hiked the key loan rate, the latest measure in a long campaign to slow runaway growth in the Chinese economy, which last year expanded 10.7 percent.

The central bank's announcement on Saturday raised rates by 27 basis points, taking one-year deposits to 2.79 percent and one-year lending to 6.39 percent.

The bank cited inflation and controlling growth in money, credit and investment as crucial to ensuring financial stability and steady and reasonable economic growth.

Highlighting the need to slow the economic expansion was the speed with which the regulators reacted after data last week suggested that inflation was on the rise, exports were bounding ahead and lending had skyrocketed.

"The fact the bank chose not to delay the rate hike for another week signals its urge to tighten policy in a most timely manner to prevent further acceleration in loan and investment growth and to help contain asset inflation," said Ma Jun (馬駿), a chief economist at Deutsche Bank.

Last week's export figures, which China has acknowledged it must do more to slow in order to rebalance its trade relations, showed a jump of 51 percent last month while loans soared 36.8 percent in a two month period.

Meanwhile, a sharp rise of 18.5 percent in industrial output followed news that China's key inflation measure, the consumer price index (CPI), jumped to 2.7 percent last month, added to the evidence that the economy is picking up even more speed.

"CPI growth is approaching 3 percent which is certain to make officials nervous because they would like it below 3 percent," said Huang Yiping (黃益平), an economist at Citigroup in Hong Kong.

"Also the fact that the trade surplus remains large and liquidity remains abundant, that's kind of a potential risk for both a likely investment rebound and a possible asset price bubble," Huang said.

The central bank's decision followed on the heels of a warning from Chinese Premier Wen Jiabao (溫家寶) that economic growth at current rates was "not sustainable."

"Now we have an excessively high investment ratio and we have an excessively large extension of credit and excessive liquidity in the market," Wen told a press briefing on Friday at the end of the National People's Congress.

The remarks have become all too common among top officials in recent months, with Vice Premier Zeng Peiyan (曾培炎) the latest to warn at a weekend conference of the risks China faced unless action was taken now.

"Serious environmental and resources constraints, irrational industrial structure and development gaps between urban and rural areas as well as between regions make it imperative to accelerate change of the growth model in pursuit of sustainable development," Zeng was quoted as saying by the China Daily.

Yet analysts say regulators must take more stringent measures if they are to win the battle to slow and rebalance the word's fourth-largest economy.

"This rate hike alone will unlikely play a significant role in slowing money, credit or investment growth," Bank of America's China economist, Wang Qian, told clients in a note.

Currently low interest rates only add to the already ample liquidity as exports pump up investment even more, fuelling the kind of bull run that has put Chinese share prices up 150 percent since January last year.

"We believe that to dampen the rapid increase of stock market prices may have featured largely in the bank's rate decision this time," Wang said.
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