Banking News
- Central bank raises interest rates again
Date: 17-Sep-2007 Sources: (Shenzhen Daily)
THE central bank raised interest rates Friday for the fifth time this year, quickening the pace of monetary tightening days after inflation jumped to the highest level in nearly 11 years.
Inflation spurted to 6.5 percent in the year to August, the fastest pace since December 1996.
'It was inevitable. The government will probably continue to raise rates in the next six months or so unless the United States slows very sharply,'said Paul Cavey, an economist with Macquarie Securities in Hong Kong.
The People's Bank of China ordered an increase of 0.27 percentage points in commercial banks' benchmark one-year deposit and lending rates to stabilize inflation expectations.
The central bank said it also wanted to slow credit growth and brake the pace of investment, the main engine of China's double-digit economic growth. Figures released earlier Friday showed that capital spending on fixed assets quickened to 26.7 percent in the first eight months from a year earlier.
Inflation is eroding the real value of money left in the bank. This has encouraged savers to pile into property and stocks - running the risk of asset bubbles that, if they burst, would pose another threat to economic and social stability in the lead-up to next year's showcase Olympic Games in Beijing.
'It's an attempt to improve returns on ordinary deposit accounts and to stem the outflow of money from the banking system into the stock market,'said John Kemp, an economist at Sempra Metals in London.
The Shanghai A-share market has more than quadrupled since the start of 2006. Property prices rose 8.2 percent in the year to August but climbed at a much faster clip in big cities.
'The fact that they raised deposit rates is a recognition that the A-share market is getting toppy and they don't want to see it going further,'agreed Ronald Chan, chief investment officer for Asian equities at Fortis Investments in Hong Kong.
The central bank has now increased rates seven times since April 27, 2006. The previous rate rise was Aug. 21.
Central bank governor Zhou Xiaochuan said a week ago that, in judging whether inflation-adjusted interest rates are positive or negative, it was important to look at inflation over a horizon of six to 12 months, not just one month.
The latest increase, effective Saturday, lifts the one-year deposit rate to 3.87 percent - almost exactly in line with China's year-on-year inflation rate of 3.9 percent over the first eight months of the year.
'There will be more hikes. Zhou has said he wants to push real interest rates into positive territory,'said Yu Rongquan, chief investment officer with Guotai Asset Management.
'We have entered an interest rate hike cycle,'he added.
The danger for China is that a fresh wave of destabilizing speculative capital, lured by the prospects of a continued rise in the yuan, could flood into the country if it keeps raising interest rates at the same time as U.S. rates are pointing lower to alleviate the subprime mortgage crisis.
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