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Rate may go up again to curb rise
Latest Updated by 2006-08-22 09:05:52
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China's latest interest-rate hike will likely cool a credit-driven economy but authorities may need to raise the rate again and optimize its foreign-exchange regime to prevent investments from resurging, economists said.

The People's Bank of China, the central bank, on Saturday increased its one-year benchmark deposit rate by 27 basis points to 2.52 percent and it boosted the one-year lending rate by the same amount to 6.12 percent.

The move came after it lifted the loan rate in April, and since then has pushed up the portion of deposits that lenders must park with the central bank by 1 percentage point to 8.5 percent.

"The rise in the rates is a much more efficient and credible monetary tightening than a reserve requirement hike or other pure administrative measures," said Liang Hong, an economist at Goldman Sachs Asia.

"Market participants in China are very responsive to changes in interest rates, therefore, we expect a higher borrowing cost will be much more effective to keep investment growth under control."

China's economy, at a decade-high 11.3 percent in the second quarter, was largely bolstered by red-hot investments and mounting trade surpluses. The government has been encouraging more domestic consumption to drive the economy.

Growth in China's urban fixed-asset investments from January to July moderated slightly to 30.5 percent from the first half's 31.3 percent.

In the first six months, new domestic currency loans reached 2.18 trillion yuan, against a government target of 2.5 trillion yuan for the full year.

"We believe that PBoC's decision shows an emerging confidence from policy makers that consumption growth is strong enough to sustain overall economic expansion despite modest deposit rate hikes," said Ma Jun, an economist at Deutsche Bank.

Ma predicted one more small hike in banks' reserves or interest rates is expected by the end of the year, a view echoed by Liang who said the central bank will raise lending and deposit rates by another 27 basis points by end of the year.

Liang also said the government may let the Chinese yuan appreciate faster by widening the daily trading band as it moves to curb overheating pressure.

Editor: Yan

By: Leo ZhangSource: Shanghai Daily web edition
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