BEIJING - China’s one-year benchmark
deposit rate, was increased by 27 basis points to
4.14% effective from December 21, while the
one-year lending rate was up by 18 basis points to
7.47%. It the sixth interest rate rise announced
by the People's Bank of China (PBoC) in 2007.
The rate for demand deposits was lowered
by 9 basis points to 0.72%, unprecedented in
previous rate hikes. The interest rate for
mortgage loans made from the public housing fund
was not changed.
Compared with previous
interest rate increases, the latest
jump
was made
against a much more complicated background in and
out of the country. With the continuous
appreciation of the yuan against the US dollar,
the increase will attract more capital into the
country, which could worsen the already excessive
liquidity here.
However, by lowering the
rate for demand deposits, the authorities aimed at
reducing the money in circulation and easing the
pressure of excessive liquidity.
The
earlier rate gains have played a role in checking
estate speculation by increasing costs, but they
have also placed a heavy burden on home-buyers.
The rate increases and the 10 hikes in the deposit
reserve requirement for commercial banks have also
directly reduced the profits of commercial banks.
Considering all these factors, the
authorities have obviously aimed at striking a
balance in their multiple monetary policy
objectives. The central bank raised the rate for
loans by 18 basis points and the rate for deposits
by 27 basis points, changing the current margin
between the rates for loans and deposits.
Widely called an "asymmetric" rate rise,
the differential makes it less profitable for
banks to make loans. Thus, it could check their
lending impulse, help to tighten money supply and
cool the economy. The lowered rate for demand
deposits can compensate the potential loss of
banks for the overall narrowed margin between
loans and deposits.
Different from the
earlier rate hikes, the sixth increase did not
change the rate of mortgage loans made from the
public housing fund, a government-initiated
project to offer low-interest loans to salary
earners by pooling their own savings and the money
handed in by employers.
Since the latest
interest hike was just two weeks ago, it is too
early to say whether it can achieve policy goals
smoothly and its influence on the economy cannot
be foretold easily.
Judging from current
conditions, the interest rate rise will be a
strong aid for the authorities concerned about
inflation pressure. According to a PBoC survey,
47.6 % of respondents thought prices rose "too
dramatically to accept" in the fourth quarter of
2007 and 64.8 % expected prices to keep rising in
2008.
The wide inflation expectations will
affect decisions on consumption, saving,
production and investment by individuals and
businesses, becoming an engine to drive prices up.
It will also increase demand for commodities of
investment value and capital assets.
The
interest rate rise will tame this expectation by
changing the prices of financial assets on the
market. It will also stabilize prices and maintain
the living standards of the common people.
Under normal conditions, a higher interest
rate would drain the capital supply from the stock
market by raising the financing costs of listed
companies. But an asymmetric rate rise may not do
so.
The lowered rate for demand deposits
would attract considerable money, estimated to be
between 6.8 trillion (US$897 billion) and 8.5
trillion yuan across the country, into deposit
accounts of fixed maturity. The rest of the
capital would flow to more rewarding investments.
The estate market, an alternative investment tool
to the stock market, has become sluggish and risky
in many cities as a result of cooling policies
introduced by the government.
So it is not
difficult to predict that the stock market, which
is in a relatively lower position than it was even
lat autumn, will soon receive money inflows.
following the sixth rate rise.
This rise
will have a minor impact on home-buyers, most of
whom have chosen to repay their mortgage loans
over a 10-year period or even longer. At the same
time, those seeking investment revenue from estate
deals may see potentially higher costs. Most
estate speculators borrow loans over a five-year
maturity period or even shorter, the rate has also
been raised this time.
Estate developers,
especially those not listed and relying on banks
for financing, will feel an even more substantial
blow to their expansion or even everyday
operations.
After six rounds of hikes, the
actual interest rate of the country, the interest
rate minus the growth rate in the consumer price
index and the tax for interest income, is still
under zero. With a negative actual interest rate,
bank deposits could decrease at a surprising rate.
This needs to be addressed urgently.
Qi
Jingmei is an economist with
the State Information Center
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
