China to raise interest rates
Central bank moves to curb investment and credit growth with third hike in less than a year.
March 17 2007: 9:56 AM EDT
BEIJING (Reuters) -- China's central bank said on Saturday that it was raising interest rates for the third time in less than a year to put a lid on credit and investment and keep the world's fourth-largest economy on an even keel.
The People's Bank of China said that, effective Sunday, its benchmark one-year yuan lending and deposit rates would rise by 0.27 percentage point each. That brings the one-year deposit rate to 2.79 percent and the lending rate to 6.39 percent.
"The rate increase is conducive to the reasonable growth of credit and investment, to stabilising prices, to the stable operation of the financial system, to balancing growth and improving the structure of the economy, and to promoting the healthy but rapid development of the economy," the central bank said in a statement on its Web site (www.pbc.gov.cn).
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The move follows an increase of lending rates alone on April 27 of last year and a rise in both rates last Aug. 18. The central bank has also raised banks' required reserves five times since last June, to help soak up liquidity generated by the country's large balance-of-payments surplus.
Many economists had expected the central bank to take further tightening measures after a batch of strong economic data for February showed credit surging, factories expanding output rapidly, and exports growing 50 percent from a year earlier.
"In light of the data over the past few days, this isn't the slightest bit of a surprise," said Jim O'Neill, chief global economist at Goldman Sachs.
Premier Wen Jiabao also said on Friday after the end of the annual session of parliament that China needed to do more to address striking economic imbalances including excessive growth in credit and investment.
Banks extended 981.4 billion yuan ($127 billion) of loans in the first two months of 2007, equal to about 30 percent of all yuan credit offered last year.
All about the yuan
But O'Neill stressed that the key to addressing China's liquidity problems was to let the yuan appreciate more quickly.
"We've repeatedly said for several years now that without an even stronger exchange rate, this is not likely to be effective," he said.
The yuan has now appreciated about 4.8 percent against the dollar since Beijing revalued it by 2.1 percent and set it free from a dollar peg to float within managed bands in July 2005. It touched a post-revaluation high on Friday.
But many economists say the only way to close off the tap of liquidity at the source is to let the yuan strengthen even more so as to make Chinese exports more expensive.
That would help ease the swelling trade surplus, which hit a near-record $23.76 billion in February, far more than expected.
The central bank, in an effort to keep the yuan stable, buys most of the dollars generated by the surplus, for which it must in turn print yuan, thus flooding the banking system with cash.
Gao Shanwen, chief economist at Everbright Securities in Shanghai, said he thought the interest rate rise would only exacerbate that problem.
"Higher interest rate rises can help slow down investment and domestic consumption. With domestic consumption weakening, more and more goods would have no market at home and have to be exported abroad, which would make the trade surplus even larger," Gao said.
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Gao said he thought the fundamental solution to China's liquidity woes was to let the yuan become more flexible.
The central bank probably raised rates partly because annual consumer inflation had tipped above the one-year deposit rate, hitting 2.7 percent in February, resulting in negative real interest rates for China's savers, said Zhao Qingming, an analyst at China Construction Bank in Beijing.
Still, Zhao also said he did not think the move would have much of an impact on curbing credit.
"Although in theory higher interest rates can increase deposits and reduce demand for capital, it is not the case in China," Zhao said. "There is great demand for funds in China. And companies will not borrow less because the rates are a little bit higher."
