Market Updates

Third Rate Hike in China

123jump.com Staff
17 Mar, 2007
New York City

    Peoples Bank of China raised interest rate for the third time in less than twelve months to curb rising asset prices and slow the economy. Chinese economy continues to grow at more than 10% above the governemet target of 8% and inflation of less than 3%. Third rate hike in interest rate may not be enough to slow the economy as long as record trade surplus persists.

Fast growing economy of China got another interest rate hike. Central bank, People’s Bank of China, raised interest rate on Saturday for one-year loan to 6.39% from 6.12% and rate on one year bank deposit to 2.79% from 2.52%. This hike in interest rate is the third in the last twelve months.

The Bank raises interest rates in increments of 0.27%. In the last twelve months lending rates were increased by a similar margin in August, 2006, April 2006 and October 2004 and deposit rates were increased in August 2006.

Steadily growing exports of Chinese made products has enabled the country to earn record amount of dollars and other foreign currencies. Foreign currency reserves of China now exceed one trillion dollars, largest reserve in the world. Rising export earnings have to be converted to local currency which increases local money supply and fuels credit for the local companies and encourages consumer borrowings.

Money supply in China has been growing at 16% and Chinese government has been soaking some of this excess liquidity from the market by increasing its borrowing. Central bank is attempting to moderate the boom and bust cycle generated through this investment in real estate and manufacturing projects. Fixed asset investment in urban areas has stayed at elevated level of 24% said Ma Kai, head of National Development and Reform Commission at a meeting last week.

For the last four years, China has been growing at more than 10% a year largely driven by growing trade surplus with the rest of the world. China recorded February trade surplus of $24 billion fueling 17% rise in money supply and stoking inflation to 2.7%. China recorded trade surplus of $177 billion in the year 2006 while the U.S. recorded trade deficit of more than $763 billion during the year.

The third rate increase was followed by rate increases in August and April of 2006 in the last twelve months has failed to curb the economic growth and rising asset prices. Fourth largest economy in the world, Chinese economy grew at 10.6% in the year 2006 and at similar rates for the last four years. Chinese government has kept Yuan at a fixed rate to dollar to sustain the exports and economic growth. However, rising money supply is inflating asset prices across China.

Shanghai stock market index rose 75% last year and lost more than 8% on February 27th, sparking a global stock market sell-off, on worries that China may crack down on stock market speculation. Real estate prices have been steadily climbing for the last five years and China is hoping that tighter credit and higher interest rates will slow down the asset price rise and curb speculation.

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