Deposit rates raised for US, HK dollars
By Zhang Dingming (China Daily)
Updated: 2005-05-19 22:59

The central bank yesterday raised interest rates on deposits of two major overseas currencies, which analysts are calling a natural response to the United States' rate hikes in recent months.

The People's Bank of China (PBOC) raised its one-year interest rate on small deposits of the US dollar by 25 basic points to 1.125 per cent, and on small Hong Kong dollar deposits by 18.75 basis points, to 1 per cent.

The increases take effect today.

Small deposits of foreign currency deposits mean those smaller than the equivalent of US$3 million. Chinese banks negotiate rates with clients on larger deposits.

"I believe it's a response to the recent frequent interest rate increases in the United States," said Wang Yuanhong, senior analyst with the State Information Centre.

"The interest spread has been rather broad, and you need to take care of the interests of local residents," he said.

The US Federal Reserve has raised its target for the federal fund rate eight times since the second half of last year, to 3 per cent currently, while the PBOC only announced one 31.25 basic point rate rise on small US dollar deposits in November before yesterday's move.

US dollar interest rates in China have largely followed their US counterparts, but the PBOC has been far less aggressive in raising rates in recent months than the Federal Reserve.

This is largely because higher US rates could help slow down the inflow of foreign capital, subsequently reducing the upward pressure on the local currency exchange rates, or the renminbi, analysts say.

Wang said the PBOC's increase in dollar rates does not necessarily prelude an increase in local currency interest rates this time, as it typically does.

"I don't think so, because prices are relatively low," he said.

China raised interest rates on renminbi deposits and lending last October, the first time in nine years, to contain inflationary pressure.

Prices have so far remained largely subdued, although some economists are calling for gradual rate increases to replace drastic administrative measures in cooling down investment growth and prices.

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