China enters interest rate increase cycle
Last Updated(Beijing Time):2004-11-03 16:37
By Wang Zhi & Zhao Xiaoqiang
The People's Bank of China made a brief statement on its website on Oct. 28, declaring that the interest rate of one-year loan is to be increased to 5.58% from the current 5.31%, and one-year deposit interest rate is to be increased to 2.25% from the current 1.98%, which marks the first deposit & loan interest rates hike in China in ten years, as China's deposit interest rate has not been changed since July 1993 and loan interest rate not since July 1995.
Though the media has anticipated it long ago, the Central Bank's declaration has aroused no-moderate reaction.
Interest rate, as the price of capital, has close ties with every sector of the society. In face of the over-heated investment started from the latter half of last year, when the policy of interest rate increase of RMB will be launched as an important measure to deflate the currency has aroused great concerns at home and abroad. Especially, Federal Reserve has increased its interest rates several times this year and the global economy has entered the anti-inflation phase; many economists suggested the Central Bank to increase interest rates. What's more, the economic statistics figures of the third quarter disclosed recently became a key factor that has urged China to make the decision to adjust its interest rates.
The analysis of the statistic figures of the previous three quarters reveals that the growth rate of 9.1% in the third quarter is obviously higher than the 8% growth rate of the second quarter, which indicates a rather strong rebound of economy. The investment on fixed assets in the whole society increased 26.5% year-on-year, which marks a 4.2 percentage point growth over the second quarter. All these suggest that new measures should be taken to consolidate the achievements of previous period's macro-control.
Obvious changes has also taken place in the Consumer Price Index (CPI), which is most concerned by the public. Though the September figure of 5.2% is lower than the August figure of 5.3%, it is increasingly under the influence of non-food factors, as the carryover effect caused by the surge of food price in the latter half of last year has diminished. The prices of water, electricity, and fuel have been kept increasing in recent months, especially. Given such factors as the soaring international crude oil price, the rising of the price of upper-stream products, it is anticipated by analysts that it is unlikely for the CPI to fall back to a lower level in a short period of time.
The afresh acceleration of investment and industrial production indicated another rise of the "temperature" of China's economy. Under such circumstances, it is believed in China that measures conforming to market rules should be introduced to make adjustments.
This round of interest rate increase is rather moderate, but it is not the end. It is probable that the Central Bank would launch substantial rate increases and it is apparent that China has entered a rate increase cycle. Under such a macroeconomic environment, industries sensitive to interest rate changes have to take corresponding risk control measures. Such industries mainly include infrastructure construction and large projects, which have a long financing cycle, as well as the real estate industry, which takes a great amount of medium and long term capital.
Dr. Zhong Wei, an economist who has been long devoted to interest rate study, made detailed comments on the Central Bank's interest rate increase move. According to him, this round of 0.27 percentage point increase of deposit & loan interest rates is rather moderate, which proclaimed the Central Bank's signal to the market that the Central Bank would not go against the will of the market, and under such synthesized influences of macro economy and a good many international factors, the Central Bank will adjust the interest rate. Put in the terms of economics, this round of interest rate increase has more proclamation effect than influence on the financial cost of economic entities.
Ba Shusong, vice director of the Financial Research Institute of the Development Research Center (DRC) of The State Council of PR China, said that the launch of the interest rate adjustment measure indicated that China's macro control is turning from administrative measures to market adjustment. He analyzed that for a certain period in the past, it was only required that banks do not provide loans to those industries with over-heated investments; and that is different from today's practice, which resorts to the interest rate leverage to expand the floating extents of interest rates of loans to those industries and thus raise the cost of capital usage in these industries. This kind of control indicates a return to the track to market-oriented reform.
Source:CE.cn
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