Governor of the People's Bank of China Zhou Xiaochuan speaks
at the opening ceremony of the annual meeting of the boards of governors
of the African Development Bank Group in Shanghai May 16, 2007.
China raised interest rates and bank reserve requirement ratio on Friday in
the latest effort to prevent the economy from overheating.
That marked the first simultaneous use of the two monetary tools in a decade,
as well as the eighth increase in reserve ratio since last July and fourth
interest rate hike since last April.
The benchmark one-year deposit rate will be increased by 0.27 percentage
point while the one-year lending rate will rise 0.18 percentage point starting
from Saturday, the People's Bank of China said in a statement on its website.
After the announcement, the one-year deposit rate stands at 3.06 percent,
slightly higher than the consumer price index growth of 3 percent in April. The
one-year lending rate is now 6.57 percent.
The banks' reserve requirement ratio will be raised by 0.5 percentage points
to 11.5 percent, effective from June 5, the central bank said.
The tightening measures came after a series of economic data suggested that
the world's fourth largest economy is evolving towards overheating.
The gross domestic product grew 11.1 percent in the first quarter of the year
while urban fixed asset investment soared 25.5 percent, official statistics
Banks extended 422 billion yuan in new loans in April, bringing the amount
for the first four months to 1.85 trillion yuan - more than half the total for
the whole of 2006.
Inflation, measured by the consumer price index (CPI), grew three percent in
April, barely meeting the central bank's target.
CPI growth not to slow down
The interest rate hike is not unexpected, said economist Wang Xiaoguang.
"However, the increase of interest rates and bank reserve ratio at the same time
is the first in this round of macro economic control."
This indicated macro control by the government is strengthening to prevent
the economy from becoming overheated, said Wang.
Ha Jiming, chief economist of China International Capital Corporation
expected the tightening to produce some effects, albeit limited.
However, the interest rate hike can hardly slow down the pace of CPI growth
in the coming months, said Ha, citing the rise in grain and resource prices.
Limited influence on stock market
Most economists believed the new measure does not target the stock market
which has soared 50 percent so far this year on top of a 130 percent rally in
2006, prompting concerns about bubbles.
"The central bank move does not mean to crack down on the stock market," said
Xia Bin of the Development Research Center under the State Council.
"It mainly addresses excessive liquidity in the macro economy."
However, the tightening is sure to have some negative influence on the equity
market, noted Xia. But the impact may be small, said Liu Jipeng of China
University of Political Science and Law.
Even after the rise, the deposit interest rate in the country is still low,
explained Liu. Therefore, the diversion from bank deposits to stock market will
On the stocks that will be more adversely affected than others, Liu Yihui of
the Chinese Academy of Social Science points to bank shares while Ha Jiming
picked industries with a high debt ratio.
The increase of deposit rate is bigger than the rise in lending rate, hereby
reducing the banks' interest spread and thus affecting their profit from
lending, explained Liu.