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New attempt by China to cool the economy (and trade partners)

Tuesday, July 31st 2007 - 21:00 UTC
Full article
People's Bank of China headquaters People's Bank of China headquaters

For a sixth time this year China tightened credit on Monday in a new effort to cool its roaring economy, ordering banks to shrink the pool of money for lending by increasing their reserves.

The move was widely expected after the economy grew by 11.9% last quarter, its fastest rate in 12 years despite earlier efforts to slow the expansion. The People's Bank of China raised interest rates on July 20 for a third time this year. The amount of reserves that lenders must keep with the central bank was raised 0.5 point to 12% of their deposits, the central bank said. The increase takes effect August 15. Beijing leaders want to keep overall growth high to reduce poverty but they worry that runaway investment in real estate and other industries could push up politically volatile inflation or spark a debt crisis if borrowers default. Regulators have tried to target individual industries with investment curbs while keeping interest rate hikes small in an effort to avoid derailing growth. Even after three rises this year, the key lending rate stands at just 6.84% on a one-year loan. But economic planners worry that the export-fueled flood of cash surging through China's economy is driving dangerously fast investment in stocks, real estate and other assets. The surge in the money supply is straining the central bank's ability to contain pressure for prices to rise. It drains billions of dollars a month from the economy through bond sales, piling up reserves that have topped 1.3 trillion US dollars. Consumer prices rose 4.4% in June the fastest pace in 33 months, (7.6% jump in food prices) and well above the official 3% target this year. The key stock index more than doubled this year to a record. On Monday, the benchmark Shanghai Composite Index rose 2.2% to close at a new all-time high of 4,440.77, breaking the previous closing high of 4346.46 set on Thursday. Bank deposits total more than 31 trillion yuan (4 trillion US dollars) and are growing by tens of billions of dollars a month, leaving plenty of money for new lending. The government has tried to rein in China's export surge by cutting rebates of value-added taxes and imposing new taxes on shipments of some goods such as steel. But the Chinese trade surplus soared to a new monthly high in June, widening 85.5% from the year-earlier period to 26.9 billion. The announcement coincided with U.S. Treasury Secretary Henry Paulson's visit to China, in which he plans to push for faster appreciation of the Yuan to reduce the trade surplus. Last month, the U.S. accounted for more than half of the gap.

Categories: Economy, International.

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