Another bid to cool economy

CHINA yesterday announced an across-the-board increase in interest rates in a bid to cool its overheated economy. It is the second rise in recent weeks.

The mainland's central bank, the People's Bank of China, raised the rate for private and institutional fixed-term bank savings by an average of 1.72 per cent. It will bring the average interest for fixed deposits to 10.42 per cent.

The average rise of the demand deposits will be 0.99 per cent. It will bring the demand deposits rate to 3.15 per cent. The overall rate on bank deposits will increase by an average of 1.35 per cent.

The cost of bank loans will climb 1.38 per cent to around 10.74 per cent.

''The central bank's decision is designed to protect the interests of depositors and ensure a healthy development of the national economy,'' the New China News Agency quoted a senior central banker as saying.

Economists and analysts said the rise had been expected, but the new interest rate was still far below the inflation rate. They felt other supplementary actions were needed in order to douse the flames of inflation.

Meanwhile, the value of the yuan is expected to fall this week, reversing last week's rally.

The US dollar rose above the nine-yuan barrier, closing at 9.22 in a special session of the swap market in Shanghai after a power cut on Friday prevented trading.

Commenting on the interest rates rise, City Polytechnic economics lecturer Huang Guobo said: ''It is too early to conclude the impact. It is a signal [to show that Beijing is keen on cooling the inflation] rather than a measure.'' He added: ''Increasing interest rates alone is not adequate to clamp down on inflation. Beijing has to implement other supplementary policies to support the move.'' Other actions included credit controls, tougher measures by the People's Bank of China, and regulating the loan policy of specialised banks, he said.

He believed that the measures would not be as tough as those implemented during the economic crisis of 1989.

He added that the rise in interest rates was still too little, compared with the shortage of funds and high inflation.

''However, the move will help to soak up funds into the banking system,'' he added.

Urban inflation in China is soaring. The cost-of-living index of 35 major cities for the first five months stood at 16.7 per cent.

A report by brokerage HG Asia said that, in the second half of last year, about 47 per cent of the country's currency was held outside the official banking system.

It added that low deposit rates kept customers away, while the negative real interest rates caused a lending boom. Money quickly left the official banking system and customers turned to the black market for loans.

A China banking analyst said: ''A substantial amount of funds have been transacted outside the banking sector. So the increase in interest rates will have a limited effect.

''However, better late than never. At least, it can narrow the gap between the interest rate and the inflation rate.'' It is the second change in rates within two months. In May, the average interest rate on bank deposits was raised by 1.19 per cent, while the rate for private and institutional fixed-term bank savings was increased to 2.18 per cent. The loan rate jumped to 0.82 per cent.

The analyst said: ''It is not very usual that the bank has changed the interest rate so often. It may indicate that it plans to float the interest rate.'' In 1990, the interest rate was changed twice, while, in 1991, it was adjusted once.

As of March, China recorded 1.224 trillion yuan (about HK$1.6 trillion) in personal savings.

Last year, money supply (M1: deposits, coins and notes) reached 1.171 trillion yuan, an increase of 30 per cent.