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Updated: February 8, 2011 19:23 IST

China hikes interest rates again to damp inflation

AP
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In this file photo released by China's Xinhua news agency, a staff member counts bank notes at a rural credit union in Xinjiang County, north China. AP.
In this file photo released by China's Xinhua news agency, a staff member counts bank notes at a rural credit union in Xinjiang County, north China. AP.

The People’s Bank of China announced on Tuesday on its website that the benchmark one—year deposit rate would rise by a quarter percentage point to three percent and the one—year lending rate would increase by the same amount to 6.06 percent. The increases are effective from Wednesday

China’s central bank raised interest rates for the second time in just over a month in a bid to dampen high inflation and guide blistering economic growth to a sustainable level.

The People’s Bank of China announced on Tuesday on its website that the benchmark one—year deposit rate would rise by a quarter percentage point to three percent and the one—year lending rate would increase by the same amount to 6.06 percent. The increases are effective from Wednesday.

Its last rate hike came on Christmas Day, when the bank raised both benchmark rates by a quarter point. China’s leaders have sought to cool surging inflation that could pose a threat to political stability.

Rising prices are especially sensitive in a country where poor families can spend up to half their incomes on food. Higher incomes have helped to offset price hikes, but inflation undercuts economic gains.

In January, the central bank signalled that fighting inflation would receive priority this year, saying in a report issued after an annual planning meeting that “stabilizing price levels will receive more prominent status.”

European shares lower, investors worry

Tuesday’s announcement, which is the third rate hike since last October, dragged European shares lower. Asian markets were already closed. Investors worry that slower Chinese growth could affect the United States, Australia and other economies by cutting demand for their exports of iron ore, machinery and other goods.

Inflation jumped to a 28—month high of 5.1 percent last November before moderating in December, but it has worried leaders who fear that a sharp rise in living costs could trigger unrest. Inflation has been sticking well above the government’s target of three percent.

China’s battle with inflation marks a sharp contrast with the United States, Europe and Japan, where growth has been muted in the aftermath of the financial crisis.

China’s rapid rebound from the global recession saw its economy, the world’s second largest, growing at a double—digit rate - a blistering expansion that slowed by the end of last year.

Analysts expect growth to slow further this year from 2010’s expansion of 10.3 percent as Beijing clamps down on credit and tries to prevent inflation, which has been largely confined to food and property, from spreading to other areas.

Chinese leaders ordered a shift from easy credit to a “prudent monetary policy” in 2011 in a planning report issued in December.

Last year’s rapid growth was driven by a flood of investment in property and other areas. Analysts have urged Chinese authorities to do more to rein in the lavish lending by state—run banks that is driving investment, a large chunk of which is believed to be in speculative property deals.

Nearly 240 billion yuan lent in new loans

In January, the banking regulator again ordered banks to tighten risk controls after the country’s biggest state—run commercial banks splashed out nearly 240 billion yuan ($36.4 billion) in new loans in the first 10 days of the year.

Authorities are also considering ways to penalize banks for flouting orders to cut back lending.

Borrowing for real estate development and other projects is the lifeblood for the sales by local governments of land use rights that provide a huge share of their revenues. Such sales rose 70 percent in 2010, helping push property prices 6.4 percent higher compared with a year earlier.

A huge pool of nonbank financing nearly doubled the amount of money available for investment last year, much of it “off balance sheet” lending whose exact scale is unknown.


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