China Again Raises Interest Rates 27 Basis Points

Friday, July 20, 2007

In a move to rein the overheated economy the People's Bank of China (PBoC) has raised its one-year lending and depositing rates for the third time in 2007 . According to a report by the one-year deposit rate will rise to 3.33% and the lending rate to 6.84% or 27 basis points more than until now. China raised the one-year deposit and loan interest rate by 27 basis points in March and by 27 and 18 basis points respectively in May.
The yuan fell 0.14 percent to 7.5740 against the dollar, extending its decline after the announcement, which came in the final minutes of the trading session. China is under pressure to allow faster currency appreciation to slow the flood of money into the economy from exports and ease trade tensions with the United States and Europe.
China also reported a record GDP growth rate of 11.5% for the first half of 2007, overtaking Germany as the third biggest economy in the world. The economic superpower has set itself a medium-target of 8% for annual GDP growth. Growth in Q2 2007 came in at 11.9%, a further acceleration from 11.1% in Q1. China has revised its GDP growth estimate for 2006 from 10.7% to 11.1% earlier this week.
Inflation is currently running at 4.4%, also well above the target rate of 3%. According to China food prices were the main driver.
Chinese officials are increasingly worried about the breakneck speed of the world's most populous nation. China's National Bureau of Statistics said the surge was based on new economic and fiscal legislation as well as a much better development of the global economy than the statisticians had expected.
-- UPDATE-- China's politicians were quite active on Friday. They also slashed the tax on interest income from 20% to a mere 5%. According to the report on China's official website the move is intended to adapt to changes in China's economic and social situation. The cut is equivalent to a 0.5 percentage point increase in deposit rates, said Frank Gong, chief China economist at JPMorgan Chase in Hong Kong in a report by the International Herald Tribune.


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