It
is after a gap of almost 30 months that China raised its interest
rates. The benchmark one year lending rate has been raised
by albeit a minuscule 27bp, from 5.58 to 5.85%, effective
April 28, 2006. Similarly, interest rates on loans with other
maturities were adjusted accordingly. Intriguingly, it has
not changed the deposit rates. One apparent reason could be
that it doesn't want the consumers to dump their savings on
banks that are already flush with liquidity.
The
reasons for the current rate hike are not far to seek. According
to the People's Bank of China (PBOC), the current hike is
meant to "consolidate achievements of the macroeconomic
management, maintain the good momentum of the sustainable,
rapid, balanced, and healthy development of the national economy
and enable the market to play a greater role in resources
allocation as well as in macroeconomic management". Viewed
against this context, the current rise in interest rate does
sound pretty modest. Yet, it is a very significant move, for,
it gives the right signal about China's intention in letting
markets play a greater role in shaping its economy. However,
it fades out if juxtaposed along with that of the US, which
has raised its interest rates 18 times in the recent past.
Incidentally, this also prods one to infer that interest rate
is still not a significant tool of China's monetary policy
nor can it assume that status so long it sticks to its pegged
exchange rate regime.
Nevertheless,
one thing is evident: the top leadership of China is pretty
jittery about its overheated economy and is anxious to cool
it off at the earliest. This well reflects in what ZhouXiaochuan,
the Governor of PBOC, said: "The economy is a little
bit hot, so we are aiming at some finetuning." Even
its President Hu Jintao had the same to say: "We do not
want, nor are we pursuing, overrapid economic growth."
Now, let us figure out what their economy has got to say.
China's gross domestic product grew 10.2% in the first quarter
of the year.
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