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Interest rate hike shows quick results
By Zhang Dingmin (China Daily)
Updated: 2004-12-12 09:18

China's recent interest rate hike has shown some early results by noticeably intensifying the willingness among local residents to deposit their money, the central bank said on Friday.

But residents are becoming more worried about rising prices, although they are more upbeat about future income, suggests the People's Bank of China's (PBOC) fourth-quarter nationwide urban depositors' survey.

The survey was conducted last month among urban depositors in 50 Chinese cities, about one month after the PBOC announced its first interest rate increase in nine years in a bid to contain rapid monetary growth and inflationary pressures.

Those who found the current deposit rates level "appropriate" rose to 43.8 per cent of all survey respondents, while the percentage of those who believed the level was "low" dropped to 53.9 per cent, down significantly from earlier levels upward of 70 per cent.

The percentage of depositors who would like to "make more deposits" hit a record-high of 39.5 per cent. The percentages of those favouring Treasury bonds and the stock market dipped marginally.

"Although the interest rate increase was a slight one, its psychological impact on urban residents has been noticeable," the PBOC said in a statement.

In October, the benchmark one-year deposit rate was raised to 2.25 per cent from 1.98 per cent, the lowest level in years, while the one-year lending rate was increased to 5.58 per cent from 5.31 per cent.

The low interest rates, coupled with accelerating prices, have been pushing Chinese residents to reduce their bank deposits and increase investments in Treasury bonds and the real estate market to seek higher returns.

More importantly, signs were found that growing amounts of savings were flowing into private loan markets to meet the funding shortages at many small and medium enterprises.

Subsequently, the growth of savings deposits slowed down in the past months. Outstanding savings deposits rose by 14.2 per cent on a year-on-year basis in the first seven months of this year, the slowest growth rate in the past 28 months.

The growth rate rebounded on a year-on-year basis only in the past two months.

The growing diversion of funds out of the banking system has frustrated policy-makers, who worried that investment bubbles may be created in the property market and, more importantly, the effect of the ongoing macro management may be eroded, said San Feng, an analyst with the State Information Centre.

"If funds keep flowing out of the banking system to the private loan market, the macro management will have little effect because the State is containing loan growth by tightening oversight at the banks," he told China Daily.

The Chinese Government started the ongoing round of macro management last year, using credit curbs and raising bank reserve requirements to harness frenzied investment and loan growth.

While local residents' growing willingness to deposit their money in the bank has presumably eased policy-makers' worries about loan-containing efforts being eroded, inflationary expectations remain high among residents, which analysts say will weigh on spending growth.

The PBOC survey found the Price Satisfaction Index at a minus 16.2 points, a historic low, it said.

And 41.5 per cent of the survey respondents expected prices to keep rising, 0.9 percentage points up from the third quarter, while only 7.1 per cent of the respondents expected a decline in prices.

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