China raises interest rates to slow inflation

Updated: 2007-03-17 17:54

Zhou Xiaochuan, Governor of the People's Bank of China, speaks during a news conference at the International Monetary Fund (IMF) - World Bank meetings, in Singapore September 17, 2006. The bank raised the key savings and lending interest rates, beginning from March 18. [Reuters]
The People's Bank of China, the central bank, raised key savings and lending interest rates from Sunday, March 18, the third time in 11 months in a bid to curb inflation and asset bubbles in the world's fastest-growing major economy.

The one-year benchmark lending rate will be raised to 6.39 percent from 6.12 percent, and the one-year deposit rate will be increased to 2.79 percent from 2.52 percent, according to a statement on the bank's website (

Item Before adjustment (%) After adjustment (%)
Termed savings
3 months 1.80 1.98
6 month 2.25 2.43
One year 2.52 2.79
Two years 3.06 3.33
Three years 3.69 3.96
Five years 4.14 4.41
6 months 5.58 5.67
One year 6.12 6.39
1-3 years 6.30 6.57
3-5 years 6.48 6.75
Over 5 years 6.84 7.11
Central bank Governor Zhou Xiaochuan 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. 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 central bank said, said in a statement posted on its website, that this interest rates adjustment will be conducive to the rational growth of credit and investment; conducive to maintaining a stable price level; conducive to the steady operation of the financial system; conducive to to the balanced economic growth and structural optimization, and conducive to promoting sound and fast groth of the national economy.

"The data released in the past week suggests that the economy is not actually slowing and that the government is becoming quite concerned that the economy is disproportionally driven by investment and production," Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, said.

"The central bank will probably raise interest rates again two more times this year," Maguire said.

Fixed-asset investment in urban areas climbed 23.4 percent in the first two months, down from 24.5 percent for all of 2006. China still must act to slow investment, Ma Kai, head of the National Development and Reform Commission, the country's top planning body, said last week.

Trade Surplus

China's economy, the world's fourth largest, expanded at the fastest pace in 11 years in 2006.

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 nine-fold in February from a year earlier to $23.76 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.

Record overseas sales pump cash into China's financial system, raising the risk of property and stock bubbles. The trade surplus in 2006 was $177.5 billion. Chinese stocks have touched record highs this year and also had the steepest decline in a decade.

Growth in urban fixed-assed investment declined to 24.5 percent for all of 2006 from 31.3 percent for the first six months. Still, the slowing of loans and spending is "not stable," Ma cautioned in January.

China's economy expanded 10.7 percent last year. Gross domestic product increased 10.4 percent in the fourth quarter, slower than the previous three months and down from the second quarter's decade high of 11.5 percent.

Besides monetary policy, China uses administrative measures to rein in investment. Developers face tighter land-appreciation taxes this year and minimum prices for property to be used for industrial developments. Environmental controls will curb spending on factories, according to the central bank.

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