China will raise one-year deposit and loan interest rates by 27 basis
points to 3.6 percent and 7.02percent respectively as of August 22, the central
bank announced yesterday.
This is the fourth time that China raised the one-year benchmark interest
rates this year and only one month after the last rise on July 21.
The move is not unexpected as China's consumer price index (CPI) in July rose
by a record high in the past ten years, said Tan Yaling, a financial researcher
with the Bank of China.
The move aims to control fast credit growth and curb the hovering risks of
inflation, the People's Bank of China (PBoC) said in a statement on its Web
site.
CPI, the main gauge of inflation, rose by 5.6 percent in July from the same
month of last year, following a year-on-year growth of 4.4 percent in June. Both
are well above the government's target of 3 percent for 2007.
Although the central government said inflation has not occurred because a
15.4-percent rise in food prices mainly contributed to the CPI rise in July,
worries about inflation risks have been swelling.
The further rise of interest rate will make bank savings more attractive as
the deposit interest rate of 3.6 percent is finally higher than the CPI rise of
3.5 percent in the first seven months of this year.
Curbing excess liquidity is the main reason for the central bank to raise the
interest rate so frequently, said Tan.
According to the central bank, financial institutions registered a
16.63-percent increase in RMB loan balance from the same period of last year to
25.31 trillion yuan at the end of July. In July alone, the figure rose by 231.4
billion yuan.
The outstanding amount of narrow money, or M1 (cash plus corporate current
deposits), stood at 13.62 trillion yuan, a growth of 20.94 percent year-on-year,
and up 0.02 percentage points over a month earlier.
The outstanding amount of broad money, or M2 (M1 plus residential savings
deposits), stood at 38.39 trillion yuan, up 18.48 percent year-on-year, 1.42
percentage points higher than the month-earlier level.
Too much cash flows swelled both the CPI growth and the mainland's stock
market. Chinese share prices continued an upward trend on Tuesday as the
benchmark Shanghai Composite Index went up1.02 percent to a record high of
4,955.20, close to the 5,000 mark after breaking the 3,000 mark in March and
4,000 mark in May respectively.
Yi Xianrong, a researcher with the Institute of Finance and Banking of the
Chinese Academy of Social Sciences, said that the rise of interest rate is still
not strong enough.
Yi insisted that a larger rise in the deposit interest rate, which would
double the current level to 54 basis points, might be more reasonable.
The government should send stronger signals to both enterprises and
individuals to affect their investment behaviors, he said.
Despite a range of tightening measures, China's GDP expanded 11.9 percent in
the second quarter this year, lifting first-half growth to 11.5 percent.
China elevated the reserve requirement ratio of financial institutions on six
occasions to curb excess liquidity. Meanwhile, the nation has loosened control
on individual overseas investment to reduce the build-up of cash in its
financial system.
A central bank report published earlier this month warned that China's
economy remains on the brink of overheating following another 12 months of
soaring industrial output and money supply.
China raised the one-year deposit and loan interest rate by 27 basis points
in March, by 27 and 18 basis points respectively in May, by 27 basis points both
in July, and reduced the withholding tax on interest income to 5 percent from 20
percent as of Aug. 15.