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Thursday, April 27, 2006

China Raises Interest Rates

The Chinese leadership obviously feel that the continued growth of fixed capital spending needs reigning in more and has today raised interest rates by 0.27 per cent, from 5.58 per cent to 5.85 per cent.

The rate rise, the first by the People’s Bank of China since October 2004, surprised the markets, which had expected Beijing to use a combination of administrative measures and higher reserve requirements for banks to rein in credit growth.

“We believe the central bank is trying to send a strong signal that the authorities mean business when it comes to controlling overheating in the economy and over-investment,” said Stephen Green, of Standard Chartered Bank, in Shanghai.

The government did not lift deposit rates, a decision which is aimed at minimising incentives for Chinese to leave their money idle in the banks rather than spending it.

The decision to lift only the cost of borrowing money also gives local banks a higher interest rates spread, meaning they can preserve their profitability even if they are forced to rein in the quantity of lending.

“Chinese banks make most of their money through their net interest margin,” said Arthur Kroeber, of China Economic Quarterly in Beijing.

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