China raised interest rates on Friday for the second time in four months in the latest effort to tame a boom in credit and investment that the central bank said posed pressing problems for the economy, REUTERS REPORTED. The People's Bank of China (PBOC) said it had ordered an increase of 0.27 percentage point in commercial banks' benchmark one-year deposit and lending rates. The deposit rate is now 2.52 percent and the lending rate stands at 6.12 percent. The PBOC raised lending rates by the same margin on April 27 but kept deposit rates unchanged. "The national economy has maintained rapid growth so far this year, and the overall situation is sound, but the problems of over-rapid investment growth and credit expansion and an excessively large trade surplus are pressing," the central bank said on its Web site (www.pbc.gov.cn). The timing of the rise caught some in the markets off guard. Powered by investment and exports, growth in the world's fourth-largest economy quickened to 11.3 percent in the second quarter from a year earlier, the fastest pace in a decade, compared with 10.3 percent for the previous quarter. But after figures this week showed slower growth in industrial output and capital spending in July, many economists thought the PBOC would hold fire, even though money supply and credit are expanding well above target. "The message is: they are trying to do something. Probably the measures are having an effect on some part of the investment story but overall they have to do much more," said Oliver Stoenner, head of emerging markets research at Commerzbank in Frankfurt. The yen, often traded as a proxy for the yuan, rallied from record lows against the euro following the rate rise. The Japanese currency also rose a third of a percent to the day's high against the dollar on the news. MORE TO COME? Japan, the European Central Bank and Australia are among major central banks that have raised borrowing costs lately, although the Federal Reserve has paused after a two-year campaign of raising U.S. interest rates. Since April, the Chinese central bank has also required banks to hold more deposits in reserve and instructed them to curb lending to specific sectors. The PBOC has also sucked more money out of the banking system through open market operations. Government ministries have weighed in with strict orders to rein in capital spending. Three senior officials in Inner Mongolia were punished this week for flouting Beijing's orders. By increasing yields on the yuan, the rate rise could encourage companies and individuals to get round the country's capital controls and bring more money into China. To Zhong Wei, an economist at Beijing Normal University, this is a strong pointer that the authorities are willing to allow a faster rate of climb in the yuan, which has risen just 1.7 percent since it was depegged from the dollar in July 2005. "The rate move indicates that the pace of the yuan's appreciation will significantly accelerate this year," he said.
