China boosts rates to cool 'surging' economy

Discussion in 'Wall St. News' started by SiSePuede!, Jul 20, 2007.

  1. By Chris Oliver, MarketWatch
    Last Update: 7:35 AM ET Jul 20, 2007

    HONG KONG (MarketWatch) -- China moved to cool the economy late Friday with a 0.27 percentage-point hike in interest rates just a day after scorching GDP data showed the nation on track for its fastest annual growth in more than a decade.

    In a statement published on its Web site, the People's Bank of China said it will raise the one-year yuan lending rate to 6.84% from 6.57%, effective Saturday. The one-year deposit rate will rise to 3.33% from 3.06%.

    It's the fifth time since April 2006 that China's central bank has lifted the benchmark lending rate.

    'The Chinese economy has proved remarkably robust in the face of rising interest rates so far.'

    — Peter Dixon, Commerzbank
    Data released Thursday showed China's economy expanded 11.9% in the second quarter, up from 11.1% from the preceding three-month period. For the first half, China's economy expanded 11.5%, suggesting current momentum will see the economy post its strongest full-year growth since 1994, when GDP climbed 13.1%.

    The GDP data exceeded consensus estimates among economists for 10.8% growth, and bettered the central bank's own estimates for 10.9% growth.

    Data also showed inflation on the rise, with consumer prices climbing 4.4% in June.

    The central People's Bank of China has set 3% growth in the CPI as the upper end of its target rate, after consumer prices rose 1.5% in 2006.

    "It was widely expected," said Dong Tao, chief regional economist for Credit Suisse in Hong Kong "I think rates will go up further, this is the only way to bring the real interest rate into balance."

    Tao said the central bank needed to "make a statement" after inflation data for June showed real interest rates had fallen into negative territory.
    "The government must respond otherwise deposits will leave banks and that will continue to fuel appreciation in the stock market and in the property market," Tao said.

    Tao expects the bank to lift interest rates twice more before the end of the year. Other moves include a likely tax exemption for interest income on bank deposits.

    Even if China's pace of economic growth tempers slightly in the second half, as many economists expect, it should overtake Germany as the world's third-largest economy by dollar value before year's end, trailing only the U.S and Japan.

    "The (coming) rate hikes will probably surprise the market to the upside," Tao said, adding the government was likely to use a soft touch in applying other measures to cool economy.
    Peter Dixon, a strategist at Commerzbank in London, said he's not expecting markets around the globe to feel an impact from the Friday tightening.

    "Investors are now more savvy (after February's sell-off). They realize that the Chinese market is relatively isolated from the rest of the world," Dixon said.
    Nor does Dixon expect the rate hike to derail China's economic growth. "The Chinese economy has proved remarkably robust in the face of rising interest rates so far," he said.

    Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.
  2. very interesting article. !>!