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PRC ups interest rates to curb inflation

China raised interest rates for the third time in 11 months to curb inflation and reduce asset bubbles in the world's fastest-growing major economy.

The one-year benchmark lending rate was raised to 6.39 percent -- its highest in almost eight years -- from 6.12 percent, starting yesterday, the Beijing-based People's Bank of China said on Saturday on its Web site. The one-year deposit rate will be increased to 2.79 percent from 2.52 percent. A central bank spokesman confirmed the increases.

Central bank Governor Zhou Xiaochuan (周小川) is concerned that cash from a record trade surplus is stoking excess investment, raising the risk of accelerating inflation and boom-and-bust cycles in asset prices.

Premier Wen Jiabao (溫家寶) said on Friday that the country's fast-paced economic expansion was unstable and environmentally unsustainable.

"The data released in the past week suggest that the economy is not actually slowing and that the government is becoming quite concerned that the economy is disproportionately driven by investment and production," Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, said on Saturday. "The central bank will probably raise interest rates again two more times this year."

Fixed-asset investment in urban areas climbed 23.4 percent in the first two months, down from 24.5 percent for all of last year.

China still must slow investment, Ma Kai (馬凱), head of the National Development and Reform Commission, the country's top economic planning body, said this month.

China's economy, the world's fourth-largest, expanded at the fastest pace in 11 years last year.

"China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced," Wen said at a news conference in Beijing on Friday.

Energy efficiency and environmental protection issues haven't been "properly resolved," he said.

The central bank raised interest rates in April and August and last month ordered banks to set aside more money as reserves for the fifth time in eight months to rein in the money supply.

The trade surplus surged ninefold last month from a year earlier to US$23.8 billion, the second-highest on record. Money supply grew 17.8 percent, the most in six months. Inflation accelerated to 2.7 percent from 2.2 percent in January.

The rate increase "reflects China's determination to curb inflation and prevent a rebound in investment," said Tai Hui, an economist at Standard Chartered Bank Plc in Hong Kong. "If inflation and investment continue to run at high numbers, there is a chance for the central bank to raise interest rates again."

Record overseas sales are pumping cash into China's financial system, raising the risk of property and stock bubbles. The trade surplus last year was US$177.5 billion. Chinese stocks have touched record highs this year and also had the steepest decline in a decade.

China prints yuan to convert the foreign currency derived from exports of clothes, electronics and steel. That adds to the money supply, which last year expanded 16.9 percent. The People's Bank sells bills to soak up some of the cash. Zhou has resisted calls from Europe and the US to let the yuan strengthen at a faster pace, making China's exports more expensive.

The yuan is kept weak to make China's exports cheap, US legislators say. The US trade deficit with the Asian nation swelled to a record US$232.5 billion last year.

The currency rose to 7.7360 against the dollar in Shanghai in the week ended on Friday from 7.7445 on March 9, according to the China Foreign Exchange Trade System. It has risen 6.7 percent from the fixed rate of 8.30 to the dollar that was scrapped on July 21, 2005.
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