The past week could be called the week of interest rate hikes: The Fed raised the US interest rates, two days after major Chinese banks, prompted by the central bank, raised their interest rates on housing loans.

While the US rate hike was a quick response to the latest inflation report, the Chinese rate change was long overdue.

In China's case, although developers are hesitant to say higher interest rates are not dampening the enthusiasm of potential home buyers, people know this is only their marketing ploy. They are saying this only because they don't hope there is a slowdown in their sales. No one can logically deduce a rise in cost will not affect the buying enthusiasm in a market economy, lest the rise in cost hasn't been strong enough.

In fact, the basic terms of home mortgages in China have remained more or less unchanged since the late 1990s, when the country was besieged by the Asian financial crisis. The housing markets in Shanghai and Beijing, which have the nation's highest housing prices, were both in a slump due to a sudden decline in overseas money both direct and indirect.

That was a time when you could get many years of exemption from management fees if you bought some space in a new office tower in Shanghai's Pudong New Area, when it was virtually half deserted and major foreign banks had not opened offices there.

In the Beijing Economic-Technological Development Area (BDA), where the largest foreign enterprise was Coca-Cola's bottling plant back then, the average housing price was 2,000 yuan (US$241) per square metre. Now, the average housing price is closer to 10,000 yuan (US$1,205) per square metre.

The price rose after Nokia moved in its immense production base to BDA. Soon DaimlerChrysler will begin rolling out China-made Mercedes-Benz cars from there.

As more people buy expensive housing for investment purposes, especially to hedge against the renminbi's possible rise against the US dollar, a rise in their financial costs is what the invisible hand would do in any market in the world.

In the last few years, despite the remaining restrictions in other industries, and especially as the domestic capital market remained tediously sluggish, the housing market became a popular playground for individuals with investment interests.

Until now, anyone could hardly think of another market in China where the rules were so simple, and the risks and benefits were so easy to calculate. And the basically fixed interest rates and buying terms were of great help. But such a twisted investment game can be dangerous in many ways.

First, it deprives people of their chance to own their homes and, in so doing, it affects society's stability; second, it is a major source of inflation, and pushes up prices of many things other than housing; and third, it siphons off a lot of money for purposes that will not yield much benefit on the economy's overall productivity, while the nation needs more to spend on technologies and more useful services.

No society can put up with such a cheap investment game. It is like a fool's paradise, in which every person can make money if only he or she has guts and acts quickly.

This caused the Asian financial crisis in 1997 and 1998. In the process of preparing for its own currency liberalization, China should remember that lesson and avoid falling into the same trap.

(China Daily 03/28/2005 page18)