China raises interest rates for 6th time this year

Updated: 2007-12-20 19:21

China will raise the one-year deposit interest rate by 27 basis points to 4.14 percent and the lending rate by 18 basis points to 7.47 percent as of December 21, the central bank said Thursday.

This is the sixth time for China to raise the benchmark interest rates this year.

Different from the five previous rate hikes, the central bank lowered the interest rate for sight deposits by nine basis points to encourage people to put more money in the bank for a fixed period, rather than having it readily available for stock or property investment.

The move is to "prevent the economy from overheating and the structural price rises from evolving into evident inflation", the central bank said in a statement posted on its website.

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With the country still facing inflationary pressure, the central bank lifted the rates to stabilize the public's expectations for inflation, a spokesman with the central bank said.

It is in line with the primary task for China's economic work in 2008 set at the annual Central Economic Work Conference held at the beginning of this month.

The country's top leaders have made curbing inflation and preventing the economy from overheating priorities for next year.

Inflation hit an 11-year high of 6.9 percent in November, far above the central bank's target of three percent. In the first three quarters, the world's fourth largest economy grew 11.5 percent and is on track to post its fifth consecutive year of double-digit growth.

To keep the rising living costs in check and prevent the economy from overheating, the top leaders pledged earlier this month to shift to a "tight" monetary policy from a decade-old "prudent" one.

Following the policy change, the central bank announced a one percent hike in the bank reserve requirement ratio. That compared with the 0.5 percent increase in the previous nine rises so far this year.

Earlier reports said the People's Bank of China will start taking special deposits again from December 27.

The special deposit includes two terms of three-months and one-year with an annual interest rate of 3.37 and 3.99 percent respectively, said the central bank.

And the special deposit targets rural credit cooperatives and city commercial banks excluding primary dealers in the open market. The central bank also says the special deposit adopts voluntary declaration of quotas.

It is the second time that the central bank has allowed such deposit in the past 20 years, and the first time took place in October this year.

The special deposit is a form of deposits where the central bank will pay interests for the funds from financial institutions, which is an effective way to mop up liquidity.

The central bank has also demanded commercial banks to cap their outstanding loans before the end of the year.

China's broad money supply, including cash and all deposits, reached 39.42 trillion yuan ($5.3 trillion) by the end of October, up 18.47 percent year-on-year, 1.53 percentage points higher than the end of last year.

These measures will create a dent in the profitability of the banks, analysts said. Property firms, a heavy borrower, will also find it harder to get financing from the bank, in the face of tighter credit, they said.

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