Peking tries to cool things down: Teresa Poole describes moves to rein in a rapidly overheating economy

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The Independent Online
CHINA has raised interest rates for the first time in two years to try to slow the pace of the country's raging economy.

After months during which the 'O' word - 'overheating' - seemed to have been banned from official discource, the state media and senior officials are openly talking about the need to rein in the economy.

First-quarter inflation ran at an annual rate of 8.6 per cent for the whole country but reached 15.7 per cent in 35 big cities. During the same period the economy grew at an annual rate of 14 per cent compared with official forecasts of 8 or 9 per cent.

China Daily at the weekend reported splurge buying in Peking of colour television sets, refrigerators and hi-fi equipment amid sharply rising prices for household electrical appliances. One shopping centre reported a sixfold increase in the sales of imported television sets.

Economists were encouraged that China was showing some resolve to deal with the inflationary problems before they got out of hand. But many point to the difficulties that the central government would have in trying to impose any austerity measures on fast-growing provinces where economic reform has taken on a life of its own, backed by huge investment in new projects.

The central authorities are also limited in what they can do. The increase in bank loan rates was limited to 0.82 of a percentage point. Any increase will immediately hit the debt-ridden, loss-making state industries that are already being bailed out by the government.

Rates for deposits have gone up more, with fixed-term savings rates increasing by 2.18 points to persuade people to keep their money in the bank.

Analysts agree that the increases sent the right signal but say they will not be enough to cool the economic fever. Even now rates remain below 10 per cent. Baring Securities estimates that inflation this year will reach 12 per cent across the country and 17 per cent in the big cities.

Other measures have been announced. Provincial banks have been told not to lend so much and there has been a squeeze on funds available for speculative property development and on the issue of company shares.

Inflationary pressures are huge. Consumers have cash in their pockets and a wide range of goods to spend it on. Many of these come from abroad, making a trade deficit likely this year.

The renminbi is already taking the strain, falling to 10 to the dollar on the black market against an official rate of 5.76.