BEIJING - The move
by the People's Bank of China (PBoC) on Saturday
to raise interest rates is aimed at cooling the
Asian powerhouse's red-hot economy by helping to
rationalize the growth of investment and lending,
maintain price stability and curb excess
liquidity, say experts.
"By raising the
interest rates, the central bank signaled its
concern over the trend towards a higher inflation
rate and an overheated economy," said Tang Min,
chief economist with the Asia Development Bank
Mission in China.
Qin Chijiang, deputy
secretary general of the China Society for Finance
and Banking, said: "The monetary policy must ensure
balanced economic
development, as the serious problem of excess
liquidity is affecting every aspect of the
economy."
The one-year benchmark interest
rates are raised by 0.27 percentage point as of
March 18. This will raise the one-year rate for
deposits to 2.79% and that for loans to 6.39%,
according to the central bank's announcement.
Boosted by the rate hike, the yuan's
exchange rate opened on Monday morning at 7.7351
to US$1, slightly up nine basis points from
Friday's closing. The Shanghai and Shenzhen stock
markets opened lower but soon rebounded.
But Chinese economists generally believe
the rate increase will help cool down the
overheating stock and property markets.
This is the first interest-rate rise in
2007 after the central bank raised commercial
banks' deposit reserve ratio by 0.5 percentage
point twice this year to rein in excessive bank
lending.
China raised borrowing costs
twice last year as the country strove to curb
lending growth, reduce overcapacity and prevent
prices from surging.
The latest
interest-rate hike was widely anticipated by the
markets.
"China's recent macroeconomic
data showed the country's growth is still pretty
fast and faces problems such as excess liquidity,"
said Zhu Yan, a Bank of China analyst. "The
interest-rate rises had been expected, although
the timing was a bit surprising as the market had
speculated the central bank might wait for the
March figures to decide."
A series of
economic data released this month reflected that
China's economy continues to remain on a fast
track with mounting liquidity.
The
country's trade surplus hit $23.76 billion in
February, the second-highest monthly figure. Money
supply added 17.8% last month, the fastest growth
in six months, and fixed-asset investment jumped
23.4% in the first two months.
The Chinese
government planned to keep the country's Consumer
Price Index, a major inflation indicator, below 3%
this year but the index rose 2.7% in February,
picking up from a 2.2% increase in January, and is
still likely to rise further.
Premier Wen
Jiabao said on Friday that China's economy still
faces big challenges, such as structural
instability and imbalances, after years of rapid
growth. Wen said problems include "too-fast rises
in investments and bank loans, excessive monetary
liquidity as well as imbalances in trade and
international payments".
PBoC governor
Zhou Xiaochuan also said last week that he
believed the nation's consumer prices have grown
"a bit faster" in recent months. Zhou said the
central bank would further use interest rates,
bank reserve requirements and bond issuances to
soak up liquidity.
China will employ a
full range of monetary-policy tools to adjust
money and credit supplies to address the problem
of excess liquidity in the banking system,
according to this year's government work report.
"The reserve ratio adjustments in January
and February were effective in absorbing excess
liquidity in banks but failed to curb commercial
banks' excessive lending," said Yin Jianfeng, an
expert with the China Academy of Social Sciences,
adding that "the interest-rate rise will help
control the overall supplies of money and credit".
Qin said: "To withdraw excess liquidity,
the central bank [has] employed a full range of
monetary-policy tools, including issuing notes,
raising deposit reserve ratio and increasing the
benchmark interest rates."
Statistics show
the PBoC has withdrawn nearly 980 billion yuan
($129 billion), including 660 billion yuan
withdrawn through open market operations and 320
billion yuan through the lifting of the required
reserve ratio. Withdrawn money this year is 2.21
times that in the same period of 2006.
The
withdrawing of nearly a trillion yuan has not
caused the tightening of funds in commercial
banks, but showed that the central bank will adopt
monetary policies to withdraw liquidity to control
credit growth.
Tang said he believes an
increase of 0.27 percentage point in the interest
rates is merely a "slight adjustment" and does not
herald the end of the central bank's control
policy.
The central bank usually raises
the deposit reserve ratio when there is excess
liquidity in the banking system and inflationary
pressures remain moderate, said Tang. But various
measures - including an interest rate-rise - will
be adopted once inflation pressures increase, he
said.
Yin said: "The central bank usually
raises the benchmark interest rates by 0.27
percentage point, because sharp adjustments will
make too strong an impact on the market."
Qin said: "An interest-rate rise may cause
overseas idle funds to enter the country.
"Economic restructuring is the fundamental
way of curbing excess liquidity and preventing a
rebound in investment."
The rate hike may
help curb fixed-asset investment, a major source
for the overheating economy.
The National
Bureau of Statistics said on Friday that
fixed-asset investment in China's urban areas rose
to 653.5 billion yuan in the first two months, up
23.4%, which was just 0.6 percentage point slower
than in the whole of last year.
Investment
in real estate, a sector the central government
has been desperately trying to rein in, grew 24.3%
to 178.6 billion yuan, according to the report.
In the January-February period, investment
in projects in the first two months of this year
authorized by the central government increased by
21.7% and in local government-approved projects by
23.6% over the same period last year.
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