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Of what benefit is the interest rate rise to ordinary people?
Latest Updated by 2006-08-23 08:39:10
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Of what benefit is the interest rate rise to ordinary people?

On August 19, 2006, the People's Bank of China, China's central bank, raised the base interest rate on both loans and deposits, while lowering the minimum rate for personal housing loans from 0.9 to 0.85 percent.

Deposits

On the first day of the interest rate raise, locals, especially senior citizens, queued at the savings offices of some ten commercial banks in Beijing. Most of them wanted to transfer their savings to a fixed interest account.

With the new interest rate, customers will earn 108 yuan more in interest from a 3-year fixed deposit of 10,000 yuan, and 216 yuan more from a 5-year deposit.

However, experts warn that interest rates will continue to be calculated at the levels they were at the day of the most recent deposit. The new interest rate will only be applied after transfer to a fixed interest account.

The rate for a 12-month deposit climbs to 2.52 percent before tax and 2.016 percent after tax. However, the one-year return rate on RMB financing products stands at a mere 2.4 to 3 percent. The gap between the two is narrowing. Although money can be withdrawn at any time, the annual return rates are mostly below 2 percent. They will become even less attractive after the interest rate rise.

Housing loans

Monthly repayments to personal housing loans will increase by 0.3 yuan for every 10,000 yuan, while the interest rate for provident housing loans remain unchanged.

According to the Beijing branch of China Construction Bank (CCB), the monthly repayment on a 10-year commercial personal loan of 10,000 yuan will increase by 2.3 yuan, a 15-year loan by 2.48 yuan and a 20-year loan by 2.66 yuan.

However, the reality is quite different to these theoretical calculations. Banks are currently most likely to grant loans to people wishing to purchase property for commercial use, then to individuals buying apartments or houses. The latter group is likely to get the base interest rate on their loan simply because this is generally considered to be a sound investment, and so the banks are very competitive.

If preferential interest rates are implemented around the time interest rates are raised, the base rate for a home loan will be lowered to 0.85 from 0.9 percent. In this instance the monthly repayment for a 10,000 yuan loan with a 10-year term would increase by a mere 0.32 yuan, for a 15-year loan it would increase by 0.33 yuan and for a 20-year loan by 0.36 yuan.

Amid the interest rate rise and the increase of commercial housing rates, the rate on provident housing funds remains unchanged. An interest difference will further increase this and a five-year term could reach up to 2.25 percent interest. Consequently experts suggest that mortgage holders should make full use of the provident housing fund.

Stock market

People tend to believe that the negative impact of an interest rate rise on the stock market is only temporary, while others argue that it strengthens the adjustment of the market.

When interest rates will be raised or whether they will be raised at all is always a matter for speculation on the stock market. The information, when it comes, spreads to investors like wildfire, despite the fact that such announcements are usually made on the weekend when the market is closed.

Ding Shenyuan, Deputy Director of Galaxy Securities Co., Ltd, said that this time the interest rate raise is moderate and therefore unlikely to have a big impact on market capital. Furthermore, the market was expecting interest rates to be raised. The central bank has promulgated several control measures such as raising loan rates and deposit reserve ratios. But those measures have had little impact on the market.

Investors tend to have mixed feelings towards interest rate rises. A netizen posted an entry on a business forum on August 18, tracking the influence of successive interest rate rises on the stock market since 1993. He asserted that the negative impact of the rise on the stock market was temporary, and supported his argument with references to foreign markets. The stock market is likely to be a bull market just one week after the rate rise.

An investor believes that the current interest rate rise will have a deeper impact than that on April 28, because the market was in a period of robust growth in April and the rise did not put any pressure on the market. However, the market is currently falling. There have been some changes in market psychology and the interest rate rise will consolidate the market adjustment.

Consumption

The interest rate hike will not inhibit consumption but nor is it likely to increase it.

Zhang Bin, Deputy Director of the Research Centre for International Finance, at the Institute of World Economics and Politics, part of the Chinese Academy of Social Sciences (CASS), said that theoretically, an interest rate rise would produce a kind of "substitution effect." People would receive a higher return on their savings so the general trend will be towards saving, rather than spending. In fact, an interest rate rise of 0.27 percent actually nullifies this effect.

The interest rate rise is unlikely to increase consumption. He Fan, assistant to the Director of the Institute of World Economics and Politics, explained that an increase in consumption depends on a permanent increase in people's incomes as well as social stability and welfare, including education, medical care and social security. The interest rate rise only provides a temporary income, not a permanent increase in earnings. Other than that, this moderate interest rate hike is unlikely to have much influence on consumption.

Editor: Yan

By: Source: People's Daily website
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