China's central bank raised interest rates Friday in the government's
strongest move yet to cool the economy verging on overheating. The news
sent resource stocks, oil and commodity prices lower.
The People's Bank of China announced Thursday it would raise the minimum rate
banks charge on one-year loans in the local currency, the yuan, by 27 basis
points to 5.85 percent.
The increase, taking effect Friday, was the first since October 2004, when
the central bank raised the lending rate by the same amount.
Oil prices, which surged in recent months in part on growing demand from
China, fell and shares of mining companies tumbled as traders bet that the
growing demand for copper, steel and other commodities fueled by China's rapid
expansion could slow.
The Chinese economy expanded by 10.2 percent in the first quarter from a year
earlier, aided in part by hefty lending by banks. That raised fears of inflation
and that already debt-laden banks could end up saddled with more bad loans.
Much of the bank lending is pouring into factories, buildings and other fixed
assets. While the central bank rate increase is a broad move intended to
discourage lending in general, the government has also taken more targeted
measures in sectors where growth appears to be outstripping demand.
The move was not entirely unexpected as speculation that Chinese authorities
would take steps to slow the economy by curbing lending had depressed Hong
Kong's stock market several days over the last week or so.
The rate increase triggered a modest reaction in the currency market, with
the dollar dropping as low as 114.22 yen as traders speculated the move had
implications for China's currency policy.
But as traders concluded that was unlikely, the dollar recovered to 114.85
yen.
"The market realized that the Chinese interest rate move doesn't immediately
mean there are direct implications for the exchange rate regime," said Jeremy
Stretch, currency strategist at Rabobank in London. "It's domestic economic
fundamentals warranting a moderate tightening of monetary policy."
China is under international pressure, particularly from the U.S., to allow
the yuan to strengthen at a more rapid pace than the government so far has
allowed. U.S. manufacturers claim the yuan is undervalued, giving Chinese
exporters an unfair advantage.
Chinese authorities have already imposed investment controls on the aluminum,
ferrous alloy, coke and cement industries. The auto industry will be next, He
Yanli, a vice director at the National Development and Reform Commission, a key
economic agency, told Dow Jones Newswires on Thursday. He said the auto industry
controls would be imposed soon.
China's car sales in the first three months this year rose 74 percent from
the same period a year earlier to 890,000, the official Xinhua News Agency
reported in early April, citing data from the China Association of Automobile
Manufacturers.