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Central bank raises lending rate to slow economy
Latest Updated by 2006-04-28 09:59:31
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The central bank announced yesterday that it would raise the minimum rate banks charge on one-year loans by 27 basis points to 5.85 per cent, the first hike since October 2004.

The rate rise, effective today, is seen as an attempt to slow rapid lending growth and an investment boom.

But the People's Bank of China kept its benchmark one-year deposit rate unchanged at 2.25 per cent.

"It's a very timely move as the first-quarter economic figures point to signs of an overheating economy in the making," said Li Yongsen, an economist with Renmin University of China.

The economy grew by a spectacular 10.2 per cent in the first quarter, leading to some economists worrying about an overheated economy.

Fixed-asset investment, a closely watched economic indicator, jumped by 27.7 per cent in the same period, up from the previous year's 25.7 per cent. Much of the bank lending is pouring into factories, buildings and other fixed assets.

The central bank's concern over the higher-than-expected lending growth may be the major reason prompting it to raise the lending rate, Li said.

"The central bank is apparently concerned about these figures, especially the robust lending growth," Li said. "That's why it has resorted to lending rate hikes instead of a reserve deposit ratio increase.

"Compared with requiring banks to lock up more deposit reserves, a rate hike is more effective in reining in lending growth," the economist said.

While the central bank rate increase is intended to discourage lending in general, the government has also taken more targeted measures in sectors where growth appears to be outstripping demand.

Investment controls have already been imposed on the aluminium, ferrous alloy, coke and cement industries.

The auto industry will be next, He Yanli, a vice-director at the National Development and Reform Commission, told Dow Jones Newswires yesterday.

Car sales in the first three months this year rose 74 per cent from the same period a year earlier to 890,000 units, Xinhua News Agency reported earlier this month, citing data from the China Association of Automobile Manufacturers.

Fuelled by growing lending and a swelling trade surplus, China's money supply, or M2 a broad measure of cash in circulation and in deposits climbed 18.8 per cent on a year-on-year basis to 31.1 trillion yuan (US$3.9 trillion) at the end of March.

Outstanding local currency loans in all financial institutions topped 20.6 trillion yuan (US$2.6 trillion) during the same period, up 14.7 per cent on a yearly basis.

"The lending rate hike is aimed at maintaining the sound momentum of the continuous, co-ordinated and healthy economic growth," the central bank said in the statement posted on its website.

Editor: Yan

By: Zheng Lifei Source: China Daily Website
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