Beijing puts up interest rates a third time, hoping to stop overheating

PUBLISHED : Sunday, 18 March, 2007, 12:00am
UPDATED : Sunday, 18 March, 2007, 12:00am

China will raise interest rates today - the third increase in less than a year - in a move to further rein in accelerating inflation and excessive growth in credit to stop economic overheating.

The People's Bank of China announced yesterday that the benchmark one-year lending rate would rise by 27 basis points - or 0.27 percentage points - from 6.12 per cent to 6.39 per cent. One-year deposit rates will be raised from 2.52 per cent to 2.79 per cent, it said on its website.

'Inflation has been increased to nearly 3 per cent in the last three months, credit growth is also picking up. There's no reason for them not to raise interest rates again,' said Jonathan Anderson, investment bank UBS' chief economist for Asia in Hong Kong.

China's record trade surplus is pumping cash into the world's fourth-largest economy and stoking inflation, fuelling overcapacity in certain industries and creating asset bubbles in the property market and, more recently, the stock markets.

The trade surplus rose almost tenfold to US$23.76 billion last month, a blowout from US$2.5 billion a year earlier, fattening the country's reserves, which top US$1 trillion. Inflation accelerated from 2.2 per cent in January to 2.7 per cent last month.

'The biggest problem in China's economy is still imbalances in the structure, that economic development is not stable, balanced, harmonious and sustainable,' Premier Wen Jiabao warned on Friday, referring to rapid growth in investment and credit lending, as well as to trade imbalances.

The bank released a statement saying that raising interest rates would help rein in lending and investment growth, maintain price stability and boost operations of the financial system. It would also improve the economic structure to ensure healthy development.

The rise was expected. The bank's governor, Zhou Xiaochuan, had warned further tightening measures were likely if excessive liquidity persisted. The broad M2 money supply rose more than 17.8 per cent last month, surpassing the 16 per cent target set by the bank for this year. M2 grew 15.9 per cent in January. Yuan bank loans rose 17.2 per cent year on year last month, up from 16 per cent in January.

The central bank raised interest rate by a similar 0.27 percentage points last April and again in August. It has raised banks' reserve requirement ratio five times since July, each time by half a percentage point. Last month's rise lifted the ratio to 10 per cent.

The central government has introduced a raft of macroeconomic measures since late 2003 to cool the economy. The measures seemed to have paid off for a while, with growth in investment and money supply easing, but policymakers are still battling to tame investment growth and prevent a rebound.

China's economy grew 10.7 per cent last year, the fastest pace in 11 years. Beijing has set a growth target of 8 per cent this year.

Fixed-asset investment in urban areas - a major economic driver - was up 23.4 per cent in the first two months compared with the same period last year. This compared with 24.5 per cent for last year.

Mr Anderson said he expected the interest rate rise to have 'very minor' economic impact.