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China tries to cope with inflation, liquidity and bubbles

Sunday, September 16th 2007 - 21:00 UTC
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China raised interest rates on Friday for the fifth time this year, in the latest of a series of tightening steps to cap inflation and prevent the world's fastest growing economy from overheating.

The People's Bank of China ordered an increase of 0.27 percentage point in commercial banks' benchmark one-year deposit and lending rates. The increases take effect on Sept 15, the central bank said. That will take the one-year benchmark deposit rate to 3.87 percent from 3.60 percent. The one-year lending rate will rise to 7.29 percent from 7.02 percent. The interest rate on sight deposits remains at 0.81 percent. The central bank's previous rate rise was on August 21 and has now increased rates seven times since April 27, 2006. The PBOC has also raised banks' reserve requirements 10 times since June 2006, most recently on September 6 when they were lifted to 12.5% of bank deposits. But Wu Xiaoling, deputy central bank governor, said on Friday that Chinese banks were not heeding the PBOC directives to slow lending growth. Banks are lending out money much faster than the central bank's target, with new loans in the first eight months of the year reaching 97% of the total for the whole of last year. Beijing authorities are determined to rein in soaring food prices, bank credit and bubbles in the real estate and stock markets. The interest rate increase comes at the end of a week in which the government reported that consumer inflation spurted to 6.5% in the year to August, the fastest pace since December 1996. The increasing frequency of interest rate rise shows Beijing's growing concern with food prices which has a significant impact for the hundreds of millions of poor Chinese that historically have had the potential to trigger political instability. Similarly with the real estate and equity market bubbles which could lead to protests from the growing middle class if their savings disappear. However the excess liquidity in the Chinese economy is fueled by the country's huge trade surplus which so far this year in eight months has reached 162 billion US dollars, 71% over 2006. This quasi mercantilist approach to trade has enabled China to amass the world's largest international reserves: over a trillion US dollars.

Categories: Economy, International.

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