Top Biz News

Central bank raises lending rate, 04/2006

By Zheng Lifei (China Daily)
Updated: 2006-04-28 06:21

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.