To Dampen Growth, China Increases Interest Rate for First Time in 9 Years

China’s first interest rate increase in nine years may cool its economy without damaging global growth, economists and international policymakers said.“They are obviously trying to have a moderating effect on their economy,” Canadian Finance Minister Ralph Goodale said.“While they would seek moderation, they are not attempting to impair what is a very buoyant economic situation.”The People’s Bank of China yesterday jolted global markets by saying it would raise the benchmark interest rates by 0.27 of a percentage point starting today, to 5.58% for one-year lending and 2.5% for deposits. Economists surveyed by Bloomberg News anticipate a series of rate increases totaling 25 to 200 basis points in the next year.Raising borrowing costs is the government’s latest measure aimed at restraining inflation now running in excess of 5% after the world’s largest developing economy grew 9.1% in 2003, the most in seven years. China’s economy accounts for about 12% of world output, double from a decade ago.“I’m pleased to see them using market-based mechanisms – interest rates – to deal with these concerns of potential inflation,” said Treasury Secretary John Snow, who this month hosted a Group of Seven meeting in Washington that included Chinese officials as dinner guests for the first time. “They’re moving more and more in the direction of more sophisticated market-based management of their economy, and I think that’s a good thing.”After initial declines, U.S. Treasury bonds and currencies including the Japanese yen and the Australian dollar rebounded on speculation the benchmark rate increase won’t slow China’s economy enough to dampen imports. China is the second-largest importer of Japanese and Australian goods.The yen traded near a six-month high against the dollar at 106.19 in midafternoon trading in New York, while the Australian dollar traded at 74.52 American cents after dropping as low as 73.75 American cents.The benchmark U.S. 4 1/4% note due in August 2014 was little changed at 101 11/32 to yield 4.08%. Earlier the yield was 4.14%, the highest since October 13.“The increase is not enough to cool inflation,” said an economist at Standard Chartered Bank in Hong Kong, Tai Hui. “China has opened the floodgates to further rate increases.”The director of global economic research at Credit Suisse First Boston in New York, Kathleen Stephansen, predicts an eventual increase of 200 basis points, equal to 2 percentage points. David Malpass, chief economist at Bear Stearns & Co. Inc. in New York, predicted 1.5 percentage point.Until this week, China avoided raising borrowing costs, relying instead on government edicts such as lending curbs introduced in April to slow expansion in industries such as steel and real estate that inflated raw-materials prices and triggered power shortages. Those measures worked to some extent.With monetary policy now playing a part, a further fading of growth is inevitable, said a China analyst at the Institute for International Economics, Nicholas Lardy. The International Monetary Fund last month projected growth of 9% this year and 7.5% in 2005.“A slowing down is now in the cards,” said Mr. Lardy, who also expects more increases. “This is the first in a set of moves.”The chief economist at Morgan Stanley in New York, Stephen Roach, agreed there are “other increases to come” and declined to predict how much. “This is good news for China – good news in the case for a soft landing,” Mr. Roach said.

To Dampen Growth, China Increases Interest Rate for First Time in 9 Years

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