Chinese Central Bank Increases Rates for First Time in 9 Years
By KEITH BRADSHER
HONG KONG, Oct. 28 - China's central bank raised interest rates on this evening for the first time in nine years in a bid to slow the country's breakneck economic growth and control inflation.
The move, the first in what many economists predict may be a series of increases, is expected to dampen prospects for a long list of companies and countries that have focused on taking advantage of the roaring Chinese market - from luxury automakers in Europe to iron ore producers in Brazil and Australia to oil exporters in the Mideast.
Higher interest rates could also hurt American companies with large beachheads in China, like General Motors, the country's second-largest automaker after Volkswagen.
At the same time, however, the decision to raise interest rates and partially deregulate them as well could ultimately enhance China's long-term growth and give its economy much greater stability. It represents an historic embrace by Beijing of free-market tools of economic management despite possible internal political repercussions, said Tao Dong, the China economist at Credit Suisse First Boston's office here.
"This probably will anger a lot of people, but I give the government high marks," because of the need to curb inflation, he said. Indebted property developers and laid-off workers are likely to rank among the angriest.
After concluding last spring that the economy was expanding at an unsustainable pace and fueling inflation, Chinese leaders initially chose mostly administrative methods to try to limit excessive growth, like the denial of zoning and environmental impact approvals for building projects.
But these methods have failed to rein in rising prices. Consumer goods, on average, cost 5.2 percent more last month than a year earlier despite price controls on many products. Price increases are running at nearly twice that pace for goods traded between companies, for which fewer price controls exist.
In making its move, the Peoples Bank of China, the central bank, raised the benchmark rates that the state-owned banking system offers for one-year loans and one-year deposits by a little more than a quarter of a percentage point: 27 hundredths of a percentage point, to be exact. The lending rate rose to 5.58 percent and the deposit rate climbed to 2.25 percent.
The Peoples Bank also ended years of regulations tightly limiting the maximum interest rates that banks could charge on loans. The limits had discouraged the country's banks, almost all state-owned, from taking the risk of lending to small and medium-sized private companies - businesses that in other countries might have been able to attract loans by agreeing to pay higher rates of interest.
Most state-owned enterprises already have the political connections to borrow at no more than the benchmark rate, and sometimes pay an even lower rate. Raising the benchmark rate will hit them especially hard at a time when many of these enterprises are already struggling to repay previous loans and avoid laying off workers.
In the United States, Treasury Secretary John W. Snow praised the decision by China to raise its interest rates as a way to cool the economy. "It indicates to me they're moving more and more in the direction of more sophisticated market-based management of their economy, and I think that's a good thing,'' Mr. Snow said during a trip to Wilkes-Barre, Pa.
But some analysts said they feared the raise in rates was calculated to mute international demands that China revalue its currency. Washington has been pressing the China to raise the value of its currency, which is pegged to the dollar, as a way to reduce the United States' trade deficit with China and make American exports more competitive.
"China's decision to raise interest rates by for the first time in 9 years only delays a revaluation of its currency instead of making it more probable,'' said Ashraf Laidi, the chief currency analyst at MG Financial Group in New York. The Peoples Bank said in a statement that its moves were partly aimed at keeping money in the banking system. Economists at the International Monetary Fund and elsewhere have watched with concern in recent months the slowing growth of deposits at Chinese banks.
Affluent urban Chinese families in particular increasingly seem to be forgoing the extremely low interest rates offered for bank deposits and lending money directly to struggling businesses at double-digit interest rates. Eswar Prasad, the China division director of the I.M.F., said on Monday that while it was unclear how much money was bypassing the banking system, it would be preferable for these kinds of dealings to occur within the purview of the financial regulatory system.
A combination of steeply rising prices and low, government-mandated interest rates have prompted companies across China to borrow heavily over the last two years, feeding an extraordinary economic boom. The borrowers have erected forests of apartment buildings and many new factories, partly in the expectation that inflation will erode the cost of repaying the loans.
"On the borrowing side, if the interest rate is 5.3 percent, then take as much as you can get, because the real rate is minus 4 percent," said Nicholas Lardy, a Chinese banking expert at the Institute for International Economics in Washington, in a telephone interview a few hours before the official announcement.
From Harbin in the north to Zhongshan in the south, many of the most fashionable boulevards in China are lined with new luxury apartment buildings with long rows of empty windows, because few buyers can afford them. Yet new apartment buildings continue to be built nearby, construction often proceeding around the clock, as is common in China.
Chinese leaders have expressed growing concern in recent months that many bank-financed projects cannot support themselves and will result in another wave of non-performing loans at state banks. The China Banking Regulatory Commission has ordered a series of reviews this year of the prudence of lending policies.
Economic data released last Friday showed that the tempo of economic growth in China barely slowed in the third quarter despite these measures, and suggested that the Chinese economy may have started to accelerate again in September as the effects of the initial controls began to wear off.
The frenzy of investment has driven up the prices of a wide range of commodities, from iron ore for the steel in building girders to copper for household plumbing, enriching many countries that export them.
For many global markets and Asian economies in particular, the decisions of China's central bank, a senior Goldman Sachs economist said in a report earlier this month, had become as important as those of the Federal Reserve.
The United States has led other industrialized nations in demanding that China allow its currency, known as the yuan or renminbi, to appreciate in value against the dollar and other currencies. But Beijing conspicuously refrained on Thursday from any revaluation, a step opposed by the country's huge export sector as possibly undermining China's competitiveness in international markets.
By raising the interest rate now but leaving the exchange rate unchanged, China runs the risk that speculators will pour more and more money into the country - possibly stoking inflation even further - in the hope that Beijing would eventually have to allow the currency to appreciate.
Mr. Prasad said in an interview on Monday that the I.M.F., partly for that reason, saw currency appreciation as a more urgent issue for China than an interest rate increase.
Many private sector economists have been divided on how much Beijing should do to slow it deliberately.
Barclays Capital economists said in a statement that the decision to raise interest rates was "unjustified," and warned that, "it increases risks of a harder landing of China's economy." Recent signs of slower growth in imports indicate that China's investment boom may already be starting to taper off, they said.
Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., also predicted big problems ahead for China's economy but for different reasons. Raising interest rates by a little over a quarter of a percentage point, he said, is not enough to slow appreciably an economy that has been growing at close to 10 percent a year.
"We continue to expect China's economy to grow at a helter-skelter pace into the New Year, until inflation reaches the point that economic stability decays into a hard landing," he wrote in an analysis for clients. "We do not see any policy remedy for this."
http://www.nytimes.com/2004/10/28/business/worldbusiness/29yuancnd.html?ei=5088&en=1dc3492c0855e630&ex=1256702400&partner=rssnyt&pagewanted=print&position=
Trackback: http://tb.donews.net/TrackBack.aspx?PostId=153667