China raises key interest rates

Ekaterina Volozova

BEIJING—(October 21, 2010) – – China Central Bank Tuesday increased interest rates for the first time since 2007. The rate on a one-year loan was raised by 0.25 percentage points to 5.56 percent effective Wednesday. The one-year rate paid on deposits was raised by 0.25 percentage points, to 2.5 percent. This was done in order to attempt to “combat inflation and soak up excessive market liquidity,” according to China Daily.

The hike reflected Beijing’s focus on guiding growth to a more sustainable level rather than reviving up the economy after it expanded by 10.3 percent in the second quarter, according to corpfreespeech.com, a website that provides information for corporations and businesses. Economists told China Daily that this move was made in order to cool the property market and curb persistent inflation. “The interest rate rise is entirely outside of market expectations,” said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

A senior economist at the Chinese Academy of Social Sciences (CASS), Zhang Xiaojing said that raising interest rates is a market-based tool that the central bank uses to absorb extra market liquidity. Over the past two years, asset prices went up, especially the price of property.

In August, the inflation in China accelerated to 3.5 percent, the highest level in 22 months, so it was necessary in this case to take government measures. “The move is reasonable, as inflation has been above the warning line of 2.25 percent for quite a long time, and is expected to hover at a high level in the coming months,” said Zhu Baoliang, deputy director of the economic projection department at the State Information Center in a China Daily report.

The impact of the rise was felt in many countries around the world. “Any time China tries to tighten the reins on their economy, it will have a ripple-down effect on the rest of the globe,” said Brad Sorensen, the director for market and sector analysis at the Schwab Center for Financial Research, in a report in the New York Times.

In September, housing prices went up in major Chinese cities by 0.5 percent on a monthly basis. “As the earlier administrative tightening measures did not work well, the interest rate hike will help curb speculative property investments and home purchases,” said Zhang Xiaoying.

Economic analysts said that they were surprised by the decision, because a central bank official had suggested recently that no rate increase was needed, reported New York Times. “This is a bucket of cold water for the market,” said Zhang Yuheng, an analyst with Capital Securities in Shanghai, in a China Daily report. He continues that “The hike itself is not a big one, but the psychological impact is big,” as expectations will grow for more rate hikes, he added.

China’s macroeconomic data is due to be released on Thursday, and many analysts say that the timing of the hike might suggest that the figure is better than expected. “It signals that Chinese policymakers have become more confident on the economy, especially regarding the strengthening momentum for domestic demand,” said Wang Qian, Chief China economist at JP Morgan, reported China Daily.

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