U.S. News

China Raises Interest Rates Again to Keep Inflation in Check


China raised interest rates on Friday in the latest of a series of tightening steps aimed at
keeping inflation in check and preventing the world's fourth-largest economy from overheating.

It also slashed withholding tax on deposit interest income to 5 percent from 20 percent, in an effort to offset the impact of soaring inflation on real deposit rates and give savers less
of an incentive to bet on the red-hot stock market.

The moves came a day after the government reported that annual economic growth accelerated to 11.9 percent in the second quarter, the fastest rate in 11-1/2 years, and that annual consumer inflation soared to a 33-month high of 4.4 percent in June.

Economists had widely expected the measures following the blistering set of data. "It's very much in line with what the market had anticipated," Kamal Sharma, currency strategist with
Bank of America in London, said of the interest rate increase.

"We have had very strong Chinese data in the past few days; the surprise would have been if China did not move. Further hikes are still very much on the cards."

The People's Bank of China, the central bank, ordered an increase of 0.27 percentage point in commercial banks' benchmark one-year deposit and lending rates, to 3.33 percent and 6.84
percent, respectively, taking effect on Saturday.

The move cooled market sentiment around the world about the state of the world economy, prompting a fall in share prices.

The central bank has now raised interest rates five times since April 27, 2006. It has also raised banks' reserve requirements eight times since June 2006.

"This interest rate adjustment will help to guide reasonable growth of credit and investment, adjust and stabilise expectations about inflation and maintain basic stability of general price levels," the central bank said in a statement.

The rise in deposit rates, along with the cut in interest income, was aimed in part at bringing real deposit rates out of negative territory, which has contributed to a flood of savings
shifting into stocks and property, driving up asset prices.

In an indication of those intentions, the central bank also raised the interest rate on sight deposits to 0.81 percent from 0.72 percent, the first such increase in over 14 years.

In announcing the cut in tax on interest income, the cabinet said that the move, effective August 15, would help to bring greater balance to the economy in the face of rapid growth in
investment and rising inflation.

Economists said that even though the government announced the two moves on the same day, they were both relatively mild and would have no significant impact on the economy.

"It's far from enough. The current interest rates are still low and real deposit rates are in negative territory," said Zhang Yongjun, an economist at the State Information Center, a
government think-tank.

Authorities have repeatedly said they are keen to keep the economy from overheating, but with a key congress of the ruling Communist Party approaching and the Olympics happening in just over a year, many economists doubt they will slam on the brakes.

"The atmosphere in Beijing is still relatively relaxed, with no obvious belief among officials or local economists that this economy is careering out of control -- or growing seriously above potential, although a small number are now taking this view," said Stephen Green with Standard Chartered Bank in Shanghai.

Indeed, some analysts said that the cut in the tax on interest income could actually encourage household spending, which grew 16 percent from a year earlier in June but which Beijing hopes to see take on more of a role in driving growth.

"By reducing tax on interest income, you are boosting post-tax income, so that people who are targeting a level of income may actually find that they can consume more," said Tom
Vosa, head of market economics at nabCapital in London.