Interest rate hike likely this month

By Shangguan Zhoudong (
Updated: 2007-07-11 11:52

China's central bank may raise the interest rate this month, and the Ministry of Finance may also cancel or cut the interest tax, according to a monthly report released yesterday by Bank of China (BOC), Shanghai Securities News reported today.

The measures are intended to cool down the nation's overheated economy.

According to the report, China's gross domestic product (GDP) for the first half of this year will be 11.3 percent higher than the same period a year earlier.

The central bank's prediction is lower; it expects GDP to increase by 11 percent in the first half of this year and 10.8 percent over 2007.

"The whole economy is speeding up and could be overheated in some sectors," the report said.

The report said that China's consumer price index in June may be up four percent from a year earlier as a result of rapid economic growth.

Currently, the benchmark one year deposits carry an interest rate of 3.06 percent. However, given the 20 percent interest tax, the actual yield is just 2.45 percent.

That return is well below the inflation rate as measured by the CPI, which is estimated to hit 3 percent in the first half of this year and 3.2 percent for the whole year, according to the central bank's report.

Even though the 20 percent interest tax was cancelled, the central bank still needs to raise the interest rate by 0.18 to 0.25 percentage points to make the real interest rate positive, according to the central bank's prediction.

The BOC report also said that China's currency, the yuan, has appreciated by 2.5 percent against the US dollar so far this year.

The yuan will appreciate 4 to 5 percent against the US dollar this year, also according to the report.

The central parity rate of the yuan, stood at 7.5951 yuan to one US dollar on July 3, gaining 124 basis points from the reference rate of 7.6075 to the dollar on July 2. It is the first time that the yuan's value exceeded 7.60 mark, according to the Chinese Foreign Exchange Trading System.

(For more biz stories, please visit Industry Updates)