China raises interest rates to tame runaway economy

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China's central bank raised interest rates for the first time in nine years yesterday in a surprise move to prevent the economy from overheating.

China's central bank raised interest rates for the first time in nine years yesterday in a surprise move to prevent the economy from overheating.

China's economy has been growing at such a pace and has sucked in so many imports that this has led to shortages in commodities such as oil and steel.

The 27-basis-points rate hike by the People's Bank of China, whose governor is Zhou Xiaochuan, marked a shift away from the policies the government had used until now to guide the economy, the world's seventh-biggest, to a path of slower growth. The central bank raised its benchmark rate on one-year yuan loans to 5.58 per cent from 5.31 per cent and the rate on one-year deposits to 2.25 per cent from 1.98 per cent.

The move raised the prospect of further rate hikes. Tapan Datta, the director of economics and strategy at Schroders, said that such a small hike in itself is "hardly meaningful," adding: "The bets will be on that further rate rises will come, given that this prolonged policy-making paralysis has been overcome. Worries are going to set in about a tighter policy environment in 2005 and their effects, as they should." Analysts also said that credit controls, used by the government until now to control the economy, are a blunt instrument while rate changes allow for fine-tuning.

While China's growth has slowed for several quarters, it was still 9.1 per cent in the year through to the third quarter. That has pushed up consumer prices by 5.2 per cent in the year to September, just off a seven-year high of 5.3 per cent in July and August.

China's booming economy is sucking in imports and this has helped drive up the prices of oil and other commodities across the globe. The rate announcement sent metals prices and mining shares tumbling, and Bund futures and US Treasuries also fell while the dollar strengthened initially as investors weighed up the prospects of a re-evaluation of China's currency, which is pegged to the greenback.

China had not raised lending rates since July 1995 and last changed them in February 2002, when they were cut to revive a slowing economy. The government had held off raising rates out of fear that higher borrowing costs would make it harder for struggling state-owned companies to repay debts to banks.

The central bank also scrapped upper limits on yuan bank lending rates yesterday.

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