Sat, Sep 15, 2007 - Page 11 News List

China hikes interest rates for the fifth time this year

COOL IT, YUAN In an effort to bring China's galloping economy to heel and stave off inflation, Beijing raised interest rates yesterday by 0.27 percent, effective today


China raised interest rates yesterday for a fifth time this year in a bid to curb rising inflation amid signs that efforts so far to cool the sizzling economy are having little effect.

The interest rate on a one-year loan will rise by 0.27 percent to 7.29 percent as of today, the central bank said. Rates paid on bank deposits also will rise by a similar margin to 3.87 percent.

"The fact that this rate hike came within one month after the last rate hike, on August 21, indicates a stronger will of the authorities to use market-oriented tools to manage the economy," said Hong Liang (梁紅), an economist with Goldman Sachs.

A rate hike was widely expected after the government said this week that inflation rose to an 11-year high last month of 6.5 percent, driven by a surge in politically sensitive food prices.

Chinese leaders want to maintain high growth to reduce poverty but worry that the current boom, fueled by exports and investment, could push inflation to dangerous levels or ignite a financial crisis.

The trouble is that even after the rate hike, bank savings will still imply an annual loss of about three percent.

"Under the circumstances, 27 basis point hikes don't have enough of an impact on the financial market," said Yi Xianrong (易憲容), an economist at the Chinese Academy of Social Sciences, the nation's top think tank.

"With a negative interest rate, the central bank should speed up the frequency and enlarge the range of the interest rate hikes," Yi said.

China's economy has powered ahead despite several rate hikes, investment curbs and other measures to shrink credit, as well as global worries about the US economy.

The economy grew by 11.9 percent in the last quarter, and the World Bank this week raised its forecast for the full year's expansion by almost a full percentage point to 11.3 percent.

Also yesterday, the government said spending on factories, real estate and other urban assets in the first eight months of the year rose 26.7 percent from the same period last year.

"This round of macroeconomic controls has continued for over four years. The relevant agencies have introduced many policy measures. But the effects haven't been obvious," the People's Daily said yesterday.

The last rate increase was Aug. 22. The communist government also has tried to shrink lending by repeatedly raising the amount of money banks must set aside in reserves.

But economists question whether such small increases in interest rates will have any impact. Many Chinese companies finance investments out of revenues rather than with bank loans, so interest rate changes have no direct effect on them.

The reserve rate rises are more than offset by the torrent of new deposits pouring into banks as booming exports send cash flooding through the economy.

The country's swollen trade surplus jumped nearly 33 percent last month to US$24.97 billion, its second-highest monthly level on record, according to the government.

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