Beijing raises interest rates

PUBLISHED : Saturday, 15 September, 2007, 12:00am
UPDATED : Saturday, 15 September, 2007, 12:00am

Central bank moves to tighten money supply as inflation surges

The People's Bank of China yesterday raised interest rates for the fifth time since March, further tightening money supply in response to figures this week showing rises in fixed asset investment, consumer prices and money supply.

The announcement followed central bank governor Zhou Xiaochuan's remarks earlier this week that he hoped real interest rates could turn positive. Earlier this month, deputy governor Wu Xiaoling also said Beijing had dropped its policy of deliberately keeping yuan interest rates low to deter capital inflows.

Effective today, the benchmark one-year lending rate will rise 27 basis points to 7.29 per cent, and the one-year deposit rate will be raised 27 basis points to 3.87 per cent.

The August consumer price index, a key measure of inflation, surged 6.5 per cent year on year, hitting an 11-year high and keeping deposit rates well in negative territory.

The rate increase aimed to 'tighten credit control, rationalise investment and stabilise expectation of inflation', the central bank said on its website.

'The 27-basis-point rate rise is expected to have limited impact on lending and economic activity, but will help manage inflation expectations,' wrote Tao Wang, the chief economist at Bank of America in Greater China in a research note.

Earlier yesterday, the National Bureau of Statistics announced spending on mainland factories, equipment and property in urban areas increased 26.7 per cent year on year in the first eight months, higher than the 26.6 per cent growth for the first seven months.

The bureau said urban fixed assets investment totalled 6.66 trillion yuan for the January-August period, 1.43 trillion yuan of which was related to property, up 29 per cent.

Investment in non-metal mine production rose 49.6 per cent from a year earlier, while those in the non-ferrous metals sector rose 29.2 per cent and coal mining and processing 22 per cent, the bureau said.

Ms Wu on Thursday sought to prepare the stock market for the rate rise by saying that the People's Bank would not adopt any policies directly affecting asset prices.

In volatile trading before the announcement yesterday, the Shanghai Composite Index edged up 0.73 per cent to 5,312.182 points.

'The fixed asset investment has been continually high. The central bank should have raised rates in 2004. It's already late,' said Yi Xiangrong, a researcher at the Chinese Academy of Social Sciences.

Along with the rate rise, the central bank has ordered lenders to set aside larger reserves seven times this year to slow growth and contain inflation.

China Economic and Business Monitor's chief analyst Ma Qing said: 'Investments remain at a high level despite macroeconomic controls because resources prices are too low. The country had been mulling adjustments but inflation and social stability concerns held it back. Now that the CPI is soaring, raising resource prices seem even more unlikely in the short term.'

The mainland has been trying to prevent economic overheating by reining in investments, shutting down or merging small industrial operations and penalising polluters.

However, more than four years of macroeconomic controls have not been effective enough, some national legislators said. A Shanghai journal said some legislators were calling for more restrictions on energy-intense and polluting industries.



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