BEIJING (AFP) — China's central bank announced Friday its fifth interest rate hike this year, after a slew of data showed the world's fourth-largest economy was still racing ahead with inflation at a decade high.
Both deposit and lending rates would rise by 27 basis points on Saturday, in a bid to "strengthen credit management, bring about reasonable growth in investment and stabilise inflationary expectations," the central bank said.
"The fact that this rate hike came within one month after the last rate hike, on August 21, indicates a stronger will of the authorities to use market-oriented tools to manage the economy," said Hong Liang, an economist with Goldman Sachs.
After the hike, the key one-year lending rate will be 7.29 percent, up 117 basis points from last year, while the one-year deposit rate will stand at 3.87 percent, up 135 basis points from late 2006.
The move comes after data was released this week showing the economy was still racing ahead, with the consumer inflation rate at 6.5 percent in August, the highest in more than a decade.
One of the main worries of policymakers is the fact that high inflation pushes real interest rates into negative territory.
This means that people lose out by putting money in banks, preferring to invest in stocks and real estate, conjuring up the spectre of a devastating asset bubble.
The trouble is that even after the rate hike, bank savings will still imply an annual loss of about three percent.
"Under the circumstances, 27 basis point hikes don't have enough of an impact on the financial market," said Yi Xianrong, an economist at the Chinese Academy of Social Sciences, the nation's top think tank.
"With a negative interest rate, the central bank should speed up the frequency and enlarge the range of the interest rate hikes."
China said earlier Friday urban fixed asset investment rose 26.7 percent in the first eight months of 2007 compared with a year earlier. Economists said this implied a 27.3 percent rise in August alone.
Even after this weekend's rate hike, the chances are the Chinese juggernaut will rumble on.
"Overall, the economy is expanding fast, and liquidity has not been brought under control at all," said Xue Hua, a Shenzhen-based economist with Merchants Securities.
Xue estimated growth this year in the world's fourth-largest economy would hit 11.3 percent, making 2007 the fifth consecutive year of double-digit expansion.
The economy grew at 11.9 percent in the second quarter of this year and 11.5 percent in the first half.
Economic growth in the 1.3-billion-people economy is helped enormously by a trade surplus which, according to data released earlier this week, hit a near-record 24.97 billion dollars in August.
While foreign trade gets most of the attention, investments form the crucial other part of the equation, and the data published Friday revealed where some of the trouble spots are.
Investment projects approved by the central government rose by a fairly modest 13.2 percent in the first eight months of the year, while projects approved by local governments increased by 28.4 percent, the bureau said.
This would appear to reflect the politics underlying much of China's recent investment boom.
The central government in Beijing wishes to rein in investment growth, because it is concerned about nationwide issues such as over-capacity in individual sectors.
Local governments, on the other hand, are much more worried about creating local jobs and boosting corporate tax revenues, and therefore are more likely to give the green light for ambitious new projects.
"The interests of the central and local governments are fundamentally at odds," said Xing Weiwei, an analyst with Jianyin Securities in Beijing.
"The central government has a hard time suppressing the investment drive in the localities," she said.
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