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    China Raises Benchmark Rates for First Time Since 2007
  • 19Oct

    China unexpectedly raised its benchmark lending and deposit rates for the first time since 2007 ahead of data that may show inflation accelerated to the fastest pace in almost two years.

    The one-year lending rate will increase to 5.56 percent from 5.31 percent, effective tomorrow, the People’s Bank of China said on its website today. The     deposit rate will increase to 2.5 percent from 2.25 percent.

    Data to be released in Beijing on Oct. 21 may show that inflation climbed to 3.6 percent in September even as economic growth moderated, median forecasts in a Bloomberg News survey show. Higher interest rates may encourage inflows of speculative capital from abroad, complicating management of the fastest- growing major economy as the government seeks to prevent real- estate bubbles.

    The central bank “wants to stay ahead of the inflation curve,” said     David Cohen, a Singapore-based economist at Action Economics. “China’s economy seems to be getting back on track and the inflation rate seems to be creeping up.” He expects another rate increase before year-end.

    Yuan forwards were little changed. The 12-month non-deliverable contract traded at 6.4425 at 7:47 p.m. local time in Hong Kong, compared with 6.4358 before the announcement. That indicates traders are betting on a 3.2 percent appreciation against the dollar in the coming 12 months.

    Bull Market

    The government may announce that gross domestic product grew 9.5 percent in the third quarter, according to a Bloomberg News survey of 25 economists. The Shanghai Composite Indexis in a so-called bull market, up 27 percent from a low in July. Officials this month extended curbs on property, including tougher down-payment requirements and more restrictions on home loans, in a clampdown after record price gains this year.

    China last raised benchmark rates in December 2007, with central bank Deputy Governor Zhu Min saying on March 25 that rates are a “heavy-duty weapon” and alternative measures were working well.

    Today’s move may be because the economic data due this week is “too strong” for the government, said Dariusz Kowalczyk, a Hong Kong-based economist and strategist for Credit Agricole CIB. He said policy makers will be under less pressure to strengthen the yuan “given that inflation is now tackled through rates.”

    The size of the increase -- 25 basis points, rather than 27 -- may suggest that the central bank is shifting towards following the conventions of international counterparts, Australia and New Zealand Banking Group Ltd. said in an e-mail.

    Credit Boom

    Peter Redward, an analyst at Barclays Plc in Singapore, said the increase may reflect growing concern that negative real interest rates, where inflation outstrips returns on savings, will push more money into asset markets.

    Chinese officials are grappling with the risk created by last year’s record 9.59 trillion yuan ($1.4 trillion) credit boom that fueled the nation’s comeback from the global recession. Inflows of capital contributed to a record gain in the nation’s foreign-exchange reserves last quarter, highlighting the risk of excess liquidity fueling price gains.

    Today’s move comes after the central bank also separately drained money from the financial system. Officials raised the reserve requirements for six banks for a two-month period, three people with knowledge of the matter said last week.

    China’s property prices in 70 cities rose 9.1 percent in September from a year earlier, according to the statistics bureau.

    Property Crackdown

    China will speed up the introduction of a trial property tax in some cities and then expand the levy to the whole country, the government said Sept. 29, without giving a timetable. The state also told commercial banks to stop offering loans to buyers of third homes and extended a 30 percent down payment requirement to all first-home buyers.

    China follows Asian economies including South Korea, Taiwan, Malaysia and India in raising borrowing costs from crisis levels. In a Bloomberg News survey after August economic data, most economists forecast China’s lending and deposit rates to remain unchanged this year.

    Today’s move contrasts with central Bank Governor Zhou Xiaochuan indicating this month that current “quantitative tools” such as bill sales and reserve requirements were sufficient in containing inflation expectations.