China raises interest rates for first time in 9 years
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China Raises Interest Rates for First Time in 9 Years (Update6)
Oct. 28 (Bloomberg) -- China's central bank jolted global financial markets by raising its benchmark interest rates for the first time in nine years to cool the world's fastest-growing major economy.
The one-year lending and deposit rates will rise 0.27 percentage point to 5.58 percent and 2.25 percent respectively, effective tomorrow, the Beijing-based People's Bank of China said in a statement on its Web site. Banks are allowed to charge interest of no less than 0.9 times the one-year lending rate.
Metals prices and global mining stocks such as BHP Billiton slumped on concern rates may be increased further in a nation that uses about a quarter of the world's steel and is the second- biggest oil consumer. China's economy is twice the size and its imports three times as large as when the central bank last raised interest rates in 1995.
``This is the weapon we were anticipating to slow the economy and is the beginning of a string of tightenings,'' said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston in New York. She predicts 200 basis points, equal to two percentage points, of increases.
Expectations for a rate increase eased since the middle of last month as officials including Chinese Vice Premier Huang Ju and central bank Governor Zhou Xiaochuan said lending curbs ordered by the government were cooling the economy. Li Yang, the head of the central bank's research institute, said on Sept. 17 that rates wouldn't be raised for at least three months.
The yield on China's benchmark seven-year government bond closed at 4.6 percent today, down from 4.9 percent on Sept. 15. Analysts at Banc of America LLC and Credit Suisse First Boston were among those surprised by today's interest-rate increase.
The timing was a surprise and ``caught a lot of people off guard,'' said Lara Rhame, a currency strategist for Credit Suisse First Boston in New York. ``We have to look at this move as a baby step into what will probably be a more broad-based effort by the Chinese to stop their economy from overheating.''
The rate increase marks a shift in Premier Wen Jiabao's policy of trying to curb growth by banning loans to selected industries including autos, cement and steel. The central bank said the results of that crackdown need to be ``consolidated.''
``This round of macroeconomic measures achieved good results,'' the central bank said in today's statement. A rate increase was needed, it said, ``to address recent conflicts and problems, and to further consolidate the results achieved.''
Gross domestic product rose 9.1 percent from a year earlier in the third quarter after climbing 9.6 percent in the previous three months. Inflation slowed to 5.2 percent in September from a seven-year high of 5.3 percent in each of the previous two months.
The last time the benchmark lending rate was raised growth halved to 7.1 percent in 1999 from 12.8 percent in 1994. Inflation was riding at an annual pace of more than 20 percent.
The impact of such a sharp slowdown on global growth would be more significant now. China consumed 55 percent of the world's cement production and 36 percent of its steel in 2003, driving a 40 percent gain in imports to $413 billion, according to the State Statistics Bureau. China's imports were $132.1 billion in 1995.
Copper fell the most in two weeks, declining as much as $75, or 2.7 percent, to $2,725 a metric ton on the London Metal Exchange. Aluminum was down $19, or 1.1 percent, at $1,751 a ton. Nickel shed $190, or 1.4 percent, to $13,150 a ton. Shares in BHP Billiton, the world's biggest mining company, fell as much as 5.4 percent in London. Arcelor, the world's biggest steelmaker, fell as much as 3.9 percent in Paris.
The rate increase may damp demand for metals as spending slows on construction, which accounts for more than half of the nation's consumption of the alloy.
``It casts a shadow over China's steel industry, which still has huge new capacity in the pipeline,'' said Chalmers Shi, principal market analyst at Hamersley China. ``People had pinned hopes on the highflying property market.''
Growth in fixed-asset investment, which accounts for about half of China's GDP, slowed to 28 percent in the nine months through September from 53 percent in the first two months of the year. Imports last month rose at their slowest pace in more than two years.
``China's bid to curb inflation has been effective so far but investment is still growing too quickly,'' said Yiping Huang, Hong Kong-based chief China economist at Citigroup Global Markets Asia Ltd. Today's ``move shows the Chinese government wants more policy tools at its disposal to address that.''
Prior to today's decision banks could charge interest rates of no more than 1.7 times the rate. That cap, combined with bans on lending, prompted an increased number of companies to borrow at higher interest rates on the black market. The limit will be scrapped for most banks from tomorrow, the central bank said.
``The black market loan interest rate has been going up a lot lately,'' said Geoffrey Cheng, an analyst with Daiwa Institute of Research in Hong Kong. ``Deposit growth in the banks has been decelerating, meaning more money is leaving the banking system.''
John Taylor, undersecretary of the Treasury for international affairs, said the rate increase would help slow the economy gradually and allow for eased currency controls. China's currency, the yuan, has been pegged at 8.3 to the dollar since 1995.
``China has grown very rapidly and there have been efforts to bring inflation pressures down,'' Taylor said in an interview. ``These actions are part of that and consistent with China moving towards a flexible exchange rate system.''
U.S. chief executives such as Dan DiMicco of Nucor, the largest U.S. maker of steel beams, say Chinese companies have a pricing edge over U.S. rivals that hampers American exports, investment and hiring because of the fixed currency.
``It's another step along the way to revaluing'' China's currency, though it doesn't make it imminent, said T.J. Marta, senior currency strategist in New York at RBC Capital Markets. ``The Chinese aren't pressured'' by anything other than their domestic concerns.
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Last Updated: October 28, 2004 11:38 EDT