MercoPress. South Atlantic News Agency

China tightens credit and monetary policy to stem speculation

The People's Bank of China widened on Friday the fluctuation band of the Yuan, raised interest rates and curbed bank loans to tame a runaway economy and ease trade tensions with United States and Europe.

The widening of the level that the Yuan can strengthen or fall against the US dollar was increased from 0.3% to 0.5% per day. The decision comes ahead of next week's economic summit between China and the US when Deputy Premier Wu Yi and US Treasury Secretary Henry Paulson meet May 22-24 in Washington. "This is clearly designed to get headlines ahead of the dialogue next week," said Julian Jessop, chief international economist at Capital Economics in London. "By raising rates and reserve requirements, the central bank sends a signal to domestic investors to dampen speculation in the equity market." China's benchmark CSI 300 Index of stocks has soared 85% so far this year. A stronger Yuan will help temper the export-led expansion that has flooded the Chinese banking system with cash, raising concern about a stock market bubble in the world's fastest-growing major economy. The currency closed at the highest since China ended a link to the US currency in July 2005, rising 0.1% for the week to 7.6686 per dollar in evening trade in Shanghai, according to the China Foreign Exchange Trade System. The People's Bank of China has allowed the Yuan to increase 7.9% since the end of the fixed exchange rate. The Yuan never moved the maximum permitted under the previous daily limit. The biggest move this year against the dollar was a 0.22% gain on May 11. The central bank says that the widening of the band does not necessarily mean that the currency will appreciate as significantly as Washington would like. China has also increased interest rates and the amount of cash that banks have to keep in reserve. The one-year benchmark lending rate will be raised to 6.57% from 6.39%, starting Saturday the People's Bank of China said. The one-year deposit rate will be increased to 3.06% from 2.79%. Both rates are the highest in more than eight years. It's the first time since 1993 that China has raised deposit rates more than lending rates. The benchmark deposit rate will be above the inflation rate for the first time in four months. That may help to stem the flow of money from households' bank accounts to the stock market. Household Yuan deposits fell by 167.4 billion Yuan (21.8 billion US dollars) in April from a month earlier, the first decline since February 2003. Li Ka-shing, Asia's richest man, on Friday warned of a bubble in China's stock market, echoing comments by People's Bank of China Governor Zhou Xiaochuan. "The government can't just sit there and do nothing as deposits leave the banking system". It is the fourth time that the People's Bank of China has raised interest rates in a little over a year in its attempts to rein in economic growth. Raising reserve requirements is also supposed to slow the economy. Banks' reserve requirements have gone up eight times in the last year - this time they have gone up half a percentage point to 11.5%.