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Central Bank Raises Key Lending Rate
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In an effort curb an investment spree and prevent economic overheating China's Central Bank announced Thursday a 0.27 percent rise in the benchmark one-year loan interest rate, according to a bank statement. The rise is designed to curb an investment boom and halt economic overheating.

The People's Bank of China said the one-year loan rate, starting Friday, would rise from 5.58 to 5.85 percent. There will be a corresponding adjustment to interest rates charged on types of loans.

It was said in a statement that the move was designed to "further consolidate the macro-control effects, keep in place a sound trend in the sustained, fast-paced, coordinated, and healthy development of national economy and continue to let economic means play a role in resource allocation and macro-control."

"The loan rate increase reflects the Central Bank's foresight on macro-control," said Wang Tongsan, an economist with the Chinese Academy of Social Sciences, an influential socio-economic thinktank. He said compared with other monetary policy tools that raising rates could more effectively rein in credit and loans.

There was wide speculation among industry observers that China might order commercial banks to increase their required reserves at the Central Bank causing an indirect drop in potential loans to individuals and enterprises.

China's economy, fueled by strong investment, soared by a higher-than-expected 10.2 percent in the first quarter even though a government spokesman one week ago dismissed fears that the world's fastest-growing major economy might be overheating.

Zheng Jingping, a spokesman for the National Bureau of Statistics told a briefing that "the growth seems to be on the fast side, but I want to say such a rate still falls within the range of expected economic growth. It remains basically normal though touching the upper limit."

He acknowledged, however that, "it should arouse concern and actually has caught our attention."

Investment in roads, factory equipment and other fixed assets, the biggest driving force for China's economy for many years, totaled 1.39 trillion yuan in the first three months, growing a sharp 27.7 percent over the same period last year. The growth rate in the first quarter this year was 4.9 percentage points higher than that of the same period last year.

Domestic banks have used roughly half of their lending target for the whole year adding 1.26 trillion yuan in loans which is up 13.98 percent from a year ago.

This prompted the State Council, or China's Cabinet, to outline moves, at a recent executive meeting chaired by Premier Wen Jiabao, to avert possible overheating by tightening controls on investment and the money supply.

Investment controls have already been imposed on the aluminum, ferrous alloy, coke and cement industries.

The Central Bank statement said all financial institutions should strictly adhere to interest rate policies and ensure a smooth adjustment of loan rates.

The rate rise is the first since Oct. 29, 2004, when the benchmark lending rate was raised to 5.58 percent and the one-year deposit rate was increased to 2.25 percent.

The 2004 rise was the first in nearly a decade and also made at a time when the government was concerned that the economy was going off course.

Today's announcement did not change interest rates on deposits. "This is to avert a negative influence on consumer spending," Wang told Xinhua.

Theoretically, increased interest paid on deposits could encourage savings and dampen spending at a time when China is hoping its consumers will contribute more to economic expansion.

While the country officially no longer sets an upper limit for loan interest rates nor lower limit for deposit rates state-controlled commercial banks all provide the same interest rates with the Central Bank setting benchmark rates.

(Xinhua News Agency April 28, 2006)

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