china raises int rates after 9 yrs

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    here is the item refered to on an earlier post.

    China Raises Interest Rates for First Time in 9 Years (Update4)
    Oct. 28 (Bloomberg) -- China's central bank raised its benchmark interest rates for the first time in nine years, stepping up efforts to curb inflation and cool growth in the world's fastest-growing major economy.

    The one-year lending and deposit rates will rise 0.27 percentage point to 5.58 percent and 2.25 percent respectively, effective tomorrow, the Beijing-based People's Bank of China said in a statement on its Web site. Banks are allowed to charge interest of no less than 0.9 times the one-year lending rate.

    The rate increase marks a shift in Premier Wen Jiabao's policy of trying to curb growth by banning loans to selected industries including autos, cement and steel. Metals prices and shares in global miners such as BHP Billiton slumped on concern rates may be increased further, reducing demand for mortgages and other consumer loans.

    ``This is the weapon we were anticipating to slow the economy and is the beginning of a string of tightenings that will occur over the next 18 months,'' said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston in New York. She predicts 200 basis points, equal to two percentage points, of increases.

    The last time the benchmark lending rate was raised, in July 1995, growth halved to 7.1 percent in 1999 from 12.8 percent in 1994. Wen's crackdown on investment has already slowed the economy. Gross domestic product rose 9.1 percent from a year earlier in the third quarter after climbing 9.6 percent in the previous three months.

    Slowing Economy

    Inflation slowed to 5.2 percent in September from a seven- year high of 5.3 percent in each of the previous two months. The one-year deposit rate was last raised in 1993 and inflation exceeded 20 percent when borrowing costs were last increased.

    ``This round of macroeconomic measures achieved good results,'' the central bank said in today's statement. A rate increase was needed, it said, ``to address recent conflicts and problems, and to further consolidate the results achieved.''

    Copper fell the most in two weeks, declining as much as $75, or 2.7 percent, to $2,725 a metric ton on the London Metal Exchange. Aluminum was down $19, or 1.1 percent, at $1,751 a ton. Nickel shed $60, or 0.5 percent, to $13,280 a ton. Shares in BHP Billiton, the world's biggest mining company, fell as much as 5.4 percent in London. Arcelor, the world's biggest steelmaker, fell as much as 3.9 percent in Paris.

    Prior to today's decision banks could charge interest rates of no more than 1.7 times the rate. That cap, combined with bans on lending, prompted an increased number of companies to borrow at higher interest rates on the black market. A cap on the interest rate banks can charge borrowers will be scrapped for most banks from tomorrow, the central bank statement said.

    Construction Demand

    Expectations for a rate increase had been easing. The yield on China's benchmark seven-year government bond closed at 4.6 percent today, down from 4.9 percent on Sept. 15. Central bank governor Zhou Xiaochuan said this month the efforts are working.

    ``China's bid to curb inflation has been effective so far but investment is still growing too quickly,'' said Yiping Huang, Hong Kong-based chief China economist at Citigroup Global Markets Asia Ltd. ``There is a strong possibility the Chinese central bank will raise rates further in the near term.''

    The rate increase may damp demand for steel and iron ore as spending slows on construction, which accounts for more than half of the nation's consumption of the alloy.

    ``It casts a shadow over China's steel industry, which still has huge new capacity in the pipeline,'' said Chalmers Shi, principal market analyst at Hamersley China. ``People had pinned hopes on the highflying property market.''

    Construction is expected to account for 58 percent of the 302 million tons of steel used in China this year, according to Beijing Antaike Information Co., a metals research company.

    ``The property market stands to be the biggest victim,'' said Luo Wei, an analyst at China International Capital Corp. ``There's unlikely to be any immediate impact on steel demand or prices. But over the longer term, the impact will definitely be negative.''

    Global Pressure

    U.S. government officials including White House economist Kristin Forbes and Treasury Department emissary Paul Speltz have weighed in to the debate on interest rates, saying the central planning approach taken by Premier Wen didn't fit with China's attempts to become a market economy.

    ``Administrative controls have limited effect in reining in inflation,'' Forbes said in a Sept. 12 speech at a World Economic Forum conference in Beijing. Speltz, in an interview the following day, described the measures as ``Band-Aids'' and said they weren't as effective as higher interest rates.

    Analysts said the move may have little impact on China's currency policy, under which the yuan has been pegged at 8.3 to the dollar since 1995.

    ``It's another step along the way to revaluing'' China's currency, though it doesn't make it imminent, said T.J. Marta, senior currency strategist in New York at RBC Capital Markets. ``The Chinese aren't pressured'' by anything other than their domestic concerns.
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