At last, China raises interest rates to
cool economy By Jamil
Anderlini
SHANGHAI - In a surprise move, China’s
central bank has announced it was raising the benchmark
lending and deposit interest rates by 0.27 percentage
points each, effective immediately. The benchmark
one-year lending rate increased from 5.31% to 5.58% and
the one-year rate on bank deposits rose from 1.98% to
2.25%.
The country's first interest rates rise
in nine years, announced Thursday, contrasted sharply
with the well-signaled, steady rises that are happening
in more developed economies, and the move caused
financial markets around the world to sit up and take
notice. United States stocks and metal prices initially
fell on fears of slowing global economic growth (up to
two-thirds of which has been attributed to China in the
past year or so) and the US dollar rose as investors bet
that a slowdown in China would weaken commodity prices
and hurt the rest of Asia, especially Japan.
Even officials in the administration of US
President George W Bush administration, involved in the
hectic buildup to next week's presidential election,
seized on the news as proof that China was preparing to
alter the yuan's peg to the dollar, due, they claimed,
to pressure applied by Treasury Secretary John Snow.
Chinese officials and most analysts, however, said the
rate rise was intended simply to cool inflation and had
nothing to do with any plans to revalue China's
currency.
The strong reaction to what is really
quite a small increase is proof of how much more
integrated China's economy is now with the rest of the
world and how important it is as an engine of world
growth. But worries that a Chinese rate rise signals a
global slowdown are unfounded and reflect the knee-jerk
nature of the markets more than anything else. The hike
is just a continuation of a policy that aims to cool the
economy to avoid a crash.
Despite growth that is
still very high, at 9.1% in the third quarter, China
appears to be in the middle of a much-touted "soft
landing", thanks to the mainly administrative measures
the government has introduced over the last year to cool
the overheating in certain sectors. The rate rise is
significant in that it shows the government is still
concerned about inflation (which dropped slightly in
September but remained high at 5.2%) and the resulting
negative real interest rates for bank deposits that have
encouraged many to withdraw deposits and invest in more
speculative assets, such as property.
The rise
also allows the People's Bank of China (PBOC) to signal
its commitment and political mandate to raise interest
rates further if inflation remains high. But most
observers do not expect a total hike of more than 0.50%.
According to PBOC and analysts' reports, inflation has
already leveled off and should fall to more sustainable
levels by next year. The government is wary about
raising rates too high because of fears that large
speculative inflows will increase pressure on China’s
currency to be revalued and there are strong voices
within the leadership that feel tightening measures have
already been too effective.
Of more long-term
significance than the rise in benchmark interest rates
was the simultaneous announcement that the PBOC had
raised the restrictive ceiling on lending rates. Banks
can now charge up to nearly 14% per annum on loans. This
is unlikely to have any great effect in the short term
because Chinese banks still have a lot of money to lend
and this puts downward pressure on rates. But what it
means for the future is more freedom to set a price on
the risk of being repaid the money they lend. This is
crucial to the healthy development of China's decidedly
unhealthy banking system, which still tends to lend
money based on political, rather than economic,
considerations.
On its website, the PBOC said
that giving the banks the ability to price risk will
allow more capital to be allocated to the private,
small- and medium-sized enterprises in China, which
often have trouble getting access to credit despite
their generally higher asset quality. In the long run,
this is far more important than a relatively small rise
in interest rates.
Jamil Anderlini is
the former editor of China Economic Review. He can be
reached at Jamilanderlini@sinomedia.net.
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