Chinesepod - China raises interest rates for 5th time in 2007

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BIZCHINA / Center

China raises interest rates for 5th time in 2007

By Zhang Ran (China Daily)
Updated: 2007-09-14 18:36

The central bank raised interest rates for the fifth time this year on
Friday as part of its continuing efforts to arrest the rising inflation
graph and prevent the economy from overheating.

The benchmark one-year lending and deposit rates will be raised by 0.27
percentage points from September 15, the People's Bank of China, the
central bank, said on its website.

That?means the one-year lending rate will increase from 7.02 percent to a
nine-year high of 7.29 percent, and the deposit rate will rise from 3.6
percent to 3.87 percent.

The last interest rate hike was on August 21.

"The move was predictable," BNP Paribas Peregrine Securities chief
economist Chen Xingdong said. "Over the past months, the central bank has
been trying to check the rising prices of consumer products, which now is
the biggest concern of the government."

The consumer price index (CPI), a key gauge of inflation, rose to 6.5
percent in August, driven mainly by rising food prices and the highest
since December 1996.

The supply of money grew 18.09 percent in August, exceeding the central
bank's annual target of 16 percent for the seventh consecutive month. And
urban fixed-assets investment rose 26.7 percent in the first eight months
of the year.

"These figures in aggregate suggest a continuous strong growth momentum
in the real economy amid excess liquidity," JP Morgan Securities (Hong
Kong) chief economist Frank Gong said.

Given the latest macro developments, analysts said Friday's interest rate
increase might not be the last this year. The central bank could raise it
again in October, Chen said, while Gong forecast one more increase of
0.27 basic points by the end of the year, followed by another in the
first quarter of next year.

Chen, however, felt Friday's interest rate hike will have very limited
impact on the property and stock markets. "Even after the interest rate
increase, the real deposit rate remains in negative territory. Since
people still fear higher inflation in the following months, they will
invest more in stocks or the property market," Chen said.

But China Jianyin Investment Securities Co senior analyst Li Zhikun
disagreed. Given the series of money tightening moves, fixed-assets
investment will finally be curbed, he said. This in turn could slow down
public companies' growth prospects and help cool down the stock market in
the long run.

(For more biz stories, please visit Industry Updates)

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