China raises interest rates for first time in a decade

Beijing, Oct 29 | Updated: Oct 30 2004, 05:43am hrs
China has unexpectedly raised interest rates for the first time in nearly a decade as concerns over inflation and underground loans prompted the government to take a bolder move to slow economic growth and lure back money circulating outside the banking system.

The hike of just over a quarter of a percentage point by the apex bank, Peoples Bank of China (PBC), on Thursday also signalled that Beijing had finally decided to shift from a selective to a sweeping approach in cooling economic growth, which stood at 9.1% during the first three quarters.

This interest rate rise is to make bigger use of economic measures in resource allocation and macro-adjustment, the PBC said in a statement while announcing the raising of benchmark rates on one-year Yuan loans to 5.5% from 5.31% and the rate on one-year deposits to 2.25% from 1.98%.

It will enable the economic means to play a bigger role in resource allocation and macro-economic control, a PBC official said. It is an important step forward to leave interest rates to market forces, improve the pricing capability of financial institutions and guard against financial risk, the official said.

Before jacking up interest rates, the government had used administrative measures such as banning new investments in certain sectors and imposing tougher rules for converting far-land for industrial use, as well as repeated increase of commercial banks required reserves.

The initial cooling-down measures did suppress run-away investment growth. But, it was found that investment growth remained high and many investors responsible for the undesired growth in sectors such as real estate were obtaining loans from creditors that shun banks because of low interest rates.