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Interest rate hike on US&HK dollar deposits
By Chuan Yu (China Daily)
Updated: 2005-12-28 06:32
China raised interest rates on US dollar and Hong Kong dollar deposits
yesterday, a move that analysts say is a response to higher interest rates on
the international market.
The People's Bank of China, the central bank, raised the upper limit for
rates on one-year US dollar deposits to 3 per cent from 2.5 per cent. The
ceiling on one-year Hong Kong dollar deposits was increase by 25 basis points to
2.625 per cent.
The adjustments become effective today.
This is the fifth time the Chinese central bank has raised interest rates on
key foreign currency deposits this year, following a similar but smoother upward
curve of rates in the United States. The dollar rate ceiling was a much lower
0.875 per cent at the beginning of the year.
"Looking at the whole year, the policy intention is quite clear," said Zhang
Xuechun, a Beijing-based economist with the Asian Development Bank.
Although China's monetary authorities do not give details about every policy
move, Zhang said yesterday's hike was an effort to keep pace with the
rate-hiking wave by the Federal Reserve in the United States. It would keep
interest differentials from widening too much.
The Federal Reserve raised its target for its federal funds rate by 25 basis
points earlier this month to 4.25 per cent, the 13th rate hike since June last
year.
Zhang said another reason for the Chinese move was to encourage local
residents to deposit more in foreign currencies instead of in the Chinese
currency, the renminbi, to help reduce the upward pressure on the local
currency.
"After the exchange rate reform, interest rate policy must be more responsive
to smoothen exchange rate fluctuations," Zhang said.
China announced a long-awaited exchange rate reform in July 21, allowing the
renminbi to appreciate by 2 per cent and linking the currency to a basket of
foreign currencies instead of the US dollar alone.
Expectations for further renminbi appreciation remain strong, as major
trading partners keep pressing China for a stronger renminbi, which they believe
is undervalued.
The renminbi has been on an upward trend against the dollar since the reform,
although movements in both directions are frequently recorded.
(China Daily 12/28/2005 page10)
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