http://online.wsj.com/public/article/0,,SB114627684753739576-gRk5okWuumQpXmNeSiuhrmnJzA4_20060505,00.html?mod=regionallinks
HONG
KONG -- China will have to do more than raise interest rates by more than
one-quarter percentage point if it is to put the brakes on its economy, market
watchers say, and there are expectations inside and outside China that the rate
rise will be followed by other small steps toward that objective.
The National Development and Reform Commission, or NDRC, the country's main
economic-planning agency, this week cautioned against overinvestment in certain
industries, including steel, aluminum and other metals. With the May Day holiday
starting Monday, some market watchers expect authorities to use that period --
when local stock and bond markets are closed -- to announce further
economic-tightening measures.
Economists expect some of these steps to be indirect, market-oriented
measures, such as open-market operations to drain liquidity from the money
market, or requiring banks to keep more of their funds locked up on deposit with
the central bank. But the NDRC could also make it harder to get some projects
approved, while banking regulators may officially discourage lending to sectors
seen as overheated. Other administrative measures could make it more difficult
to convert land to new purposes, thus constraining property developers.
In an attempt to curb its overheated economy, China's central bank starting
Friday increased its benchmark rates for loans of one year or more by 0.27
percentage point, with the widely followed one-year lending rate rising to 5.85%
from 5.58%. The higher cost of loans should make companies and households
marginally less inclined to seek to borrow money, though it may not do much to
make banks less eager to extend loans.
China's policy makers are trying to guide the country's banks to rein in
growth in the world's fourth-largest economy. But the largely state-owned
banking system is still only partially reformed, poised uncomfortably between a
planned and market system. The problem now is that neither market measures --
based on the price of money, as expressed in exchange rates and interest rates
-- nor old-style administrative directives from on high are proving effective in
reining in growth.
China's banks extended loans valued at 1.26 trillion yuan ($157 billion) in
the first quarter of 2006, more than half the amount they were instructed to
lend for the entire year. When combined with faster-than-expected 10.2% growth
in gross domestic product, and a 28% surge in investments in fixed assets like
property and industrial equipment, it looks like too much money is sloshing
around the economy.
One reason the interest-rate rise may not be very effective is that China's
banks rarely bother to use their ability to charge riskier borrowers higher
rates for loans -- a freedom they have had since October 2004.
"The biggest beneficiaries of this interest-rate increase are in fact the
banks," said Zuo Xiaolei, chief economist of Galaxy Securities in Beijing.
Because the central bank increased how much banks can charge for loans, without
a corresponding rise in how much they must pay depositors for their money,
lending has actually become more profitable.