China raises benchmark lending rate to 7.02% - the sixth increase since April 2006

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China raises benchmark lending rate to 7.02% - the sixth increase since April 2006
By Finfacts Team
Aug 21, 2007, 12:49

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The government is preparing to set up a special department under the Ministry of Construction (MOC) to ensure an adequate supply of public housing.(File Photo: Xinhua)

China said on Tuesday it will raise benchmark deposit and lending interest rates in a renewed attempt to cool down its raging economy by cutting inflation expectations and controlling credit.

The People's Bank of China said in a statement today that it will raise the one-year yuan lending rate 0.18 percentage points to 7.02% from 6.84%. It said it will increase the one-year yuan deposit rate 0.27 percentage points to 3.60% from 3.33%. The rate increases take effect Wednesday.

Tuesday's rate increases, the fourth this year, come after inflation hit a ten year high in July and continuing evidence of surging trade and and investment-driven inflows. The government is concerned that the world's fourth-largest economy may overheat, despite its previous monetary tightening and reductions in export rebates.

The consumer price index (CPI), the main gauge of inflation, in July rose by 5.6% from the same month last year, after a year-on-year growth of 4.4% in June. Both are well above the government's target of 3 percent for 2007.

Including Tuesday's move, the PBOC has raised the benchmark one-year lending rate six times since April 2006, and the one-year deposit rate five times since August last year.

Housing prices in 70 major Chinese cities were up a record 7.5% in July from the same month last year, according to a report by the National Bureau of Statistics (NBS) and the National Development and Reform Commission, that was issued last Friday.

The rise hit a new high and is 0.4 percentage points higher than the figure of June.

Beihai, Shenzhen and Nanning saw the highest price hikes at 18.6%, 16.1% and 12% respectively.

Meanwhile, a report released by the NBS showed the real estate performance indices had risen for four consecutive months to 104.00 points in July from 101.22 points in March, indicating possible overheating.

"The disparity between tight supply and overheating demand pushed the prices up," said Zhu Zhongyi, vice president of the China Real Estate Association.

Robust housing price hikes and booming demand also led to increasing property investment which saw a 28.9% rise in the first seven months of 2007, said the NBS report.

The report said the total area of "developed" land in China rose 11.3% to 142 million square meters in the first seven months. The growth was 3.7 percentage points higher than the first half of this year.

Driven by property development investment, domestic bank loans rose by 21.4%, company-raised funds by 32.2% and foreign funds soared 74.5%.