China raises interest rates to cool economy

updated 8:15 a.m. ET Aug. 18, 2006

BEIJING - China raised interest rates Friday for the second time in four months, stepping up efforts to cool off an economic boom that the government worries could spark a financial crisis.

The central bank raised the minimum rate for one-year bank loans by 0.27 percentage points to 6.12 percent, effective Saturday. It also pushed up deposit rates, apparently trying to discourage investment by making savings more attractive.

The move, following an increase in April, suggested Chinese leaders believe measures already in place are failing to cool an economy that grew by a stunning 11.3 percent in the second quarter, driven by heavy spending on factories and other assets.

“Investment growth is too fast, credit is too abundant and the trade surplus is too big,” said a central bank statement announcing the rate hike.

The increase is aimed at “curbing demand for long-term loans and the overly rapid expansion in fixed-asset investment,” the bank said. It raised longer-term rates by an even bigger margin, setting the minimum for a five-year bank loan at 6.84 percent.

The government worries that soaring investment that is driving such high growth could ignite inflation and leave banks with dangerously high debt. It has tightened bank credit and imposed curbs on new construction projects and foreign investment in real estate.

The April rate hike, also by 0.27 percent, was China’s first since October 2004.

President Hu Jintao’s government wants high growth to reduce poverty and has tried to avoid sweeping measures such as interest rate rises that might slow the economy, instead targeting industries that are believed to be growing too fast.

On Wednesday, the official Xinhua News Agency said investment in real estate and other urban assets slowed in July but was “still in the ‘hot’ range” at about 30 percent a year.

The high second-quarter growth also fed speculation that Beijing might let the tightly controlled exchange rate of its currency, the yuan, rise faster against the dollar. That could rein in growth by making exports more expensive and slowing their expansion.

MORE FROM WORLD BUSINESS

World business Section Front

Stimulus boosts China's economy French auto workers threaten to blow up factory Geithner: Recession easing, U.S. on the mend Florida judge agrees to postpone UBS case Obama: Nations must fight global warming Something missing at Pamplona: Bullishness Pepsi investing $1 billion more in Russia North Korea runs its first televised beer ad UBS must give names of suspected tax cheats Newsweek: 5 ways to simplify student aid World business Section Front   Add World business headlines to your news reader: