China Raises Interest Rate for the Fifth Time This Year

By Jason Simpkins
Staff Writer

Hoping to tighten the belt on its rapidly bloating economy, the People's Bank of China on Friday raised interest rates for the fifth time this year. The interest rate on the one-year loan was raised 0.27% to 7.29%, effective Saturday. Rates paid on bank deposits were raised by a similar margin, reaching 3.87%.

This is China's fifth rate hike this year and the second in less than a month. The country wants to maintain a high rate of growth, but worries that if it's left unchecked, it could lead to dangerous levels of inflation – or, even worse, an economic meltdown.

So far, worldwide market turmoil, credit contractions, and repeated rate hikes have failed to establish any significant drag on the economy. The mild rate hikes put into effect so far have been no match for the flood of wealth pouring in from exports.

China's trade surplus rose by another $25 billion in August, reaching $162 billion. That 71% increase from a year ago is largely responsible for the excess liquidity in China's economy.

Also, spending on factories, real estate, and other urban assets rose 26.7% in the first eight months of the year. China's economy grew by 11.9% in the last quarter, and the World Bank has penciled the full year's expansion at 11.3%.

The last rate hike was announced Aug. 22, meaning it was less than a month ago. The increased frequency at which rate increases are coming shows that China is getting more serious about throttling back its runaway economy. One reason: Food prices are accelerating even faster than general inflation, and that's having a disproportionate impact on the nation's poor, and the Communist government fears that could breed discontent.

Right now, the income gap between rural and urban residents is widening. Vice Minister of Agriculture Yin Chengjie said last Thursday that the average annual income of urban residents in 2006 was 3.28 times that of their rural counterparts. That's up from 3.22 in 2005, and 3.21 in 2004.

"Although farmers' income has been growing quite fast in recent years, the pace is still slower than the growth rate of urban residents' income," the government official said on the agency's website.

The growth rate of the income of China's farmers has risen by more than 6% for the past three consecutive years, and hit 13% in the first half of 2007.

According to the Chinese government's Ministry of Public Security, 87,000 "public order disturbances" were reported in 2005, up from 74,000 in 2004 and 58,000 in 2003.

Freedom House says on its website that one of the major sources of discontent in both rural and urban areas is the confiscation of land without adequate compensation, often involving collusion between local government and developers eager to profit from China's rapid urbanization.

Other China Related News…

• Hong Kong's Gross Domestic Product (GDP) rose 6.9% in real terms for the second quarter of the year, while its Gross National Product (GNP) rose 10.8 in real terms, according to statistics released Friday by the Hong Kong Census and Statistics Department.
• The combined business revenue of China's top 500 companies accounted for 83.5% of the country's gross domestic product in 2006, almost 6% ahead of the GDP in 2005.The China Top 500 Enterprises 2007 List released Saturday said that the Top 500 companies gained $2.3 trillion in business revenue last year, a 23.7% increase from the year prior.
• Also, as part of an effort to strengthen liquidity management in the banking system – and to curtail excessive growth of monetary credit – the People's Bank of China will raise the RMB reserve requirement ratio for depository financial institutions by 0.5%, effective Sept. 25.