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China Raises Interest Rates to Cool Economy

The central bank hopes to contain inflation and prevent overbuilding of factories. Past hikes have not slowed growth.

August 19, 2006|From Bloomberg News

China raised benchmark lending and deposit rates simultaneously for the first time in two years Friday to curb an investment boom that threatens to fan inflation and leave the nation with too many factories.

The People's Bank of China raised the one-year lending rate 0.27 of a percentage point to 6.12%, according to a statement on the Beijing-based bank's website. The one-year deposit rate was increased by the same amount to 2.52%.

A lending rate increase in April failed to slow the world's fourth-largest economy, which grew 11.3% in the second quarter from a year earlier, the most in more than a decade. Failure to control spending may leave China with idle factories, falling profits and rising bad loans, the World Bank says.

"The government is making it clear it's frustrated that previous measures introduced to date haven't had more of an impact," said Tim Condon, an economist at ING Bank in Singapore. "This won't be the last measure."

China may also let the yuan appreciate faster, said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London.

Fluctuations in the yuan this week have been the biggest since the central bank eased the currency's peg to the dollar in July last year.

Central banks in the U.S., Europe and Japan have been raising borrowing costs this year as fuel prices have risen to record levels, leaving consumers with less money for purchases. The U.S. economy grew half as fast in the second quarter as it did in the first three months.

Chinese Premier Wen Jiabao has chastised banks and local authorities for not obeying central government directives to curb expansion.

"The economy's growth had been too rapid and the increases in loans had been too much, while the imbalance in the external trade has been prominent," the central bank said in its statement Friday.

Investment in factories, real estate and roads jumped about 30% in the first seven months.

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