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China raises interest rates to cool economy

China raised interest rates Friday for the second time this year amid efforts to rein in a boom in lending and construction that the government worries could spark a financial crisis.
/ Source: The Associated Press

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.

The government hasn’t issued a growth forecast for the year, but the World Bank this week said it expects 10.4 percent.

China’s investment in factories and other fixed assets rose by 29.8 percent in the first six months of the year.

But the growth rate in some industries was even faster, hitting 44.5 percent in auto manufacturing and 40.6 percent in textiles, according to a report this month by the country’s main planning agency, the National Development and Reform Commission.

Beijing has blamed the investment surge in part on local leaders who fail to enforce controls and sometimes initiate projects in defiance of building curbs.

The central government reprimanded leaders of the northern region of Inner Mongolia this week for building an unauthorized power plant. The punishment was widely publicized in the state press in a warning to other local leaders.

Beijing has also had only mixed success in efforts to reduce reliance on exports by encouraging Chinese to spend more on travel, housing and consumer goods.

The country’s trade surplus hit a new monthly high of US$14.6 billion (euro11.3 billion) in July, 40.6 percent over the surplus in the same month last year, according to the government.

China reported a cumulative trade surplus of US$75.9 billion (euro58.9 billion) in the first seven months of the year, up 51.9 percent from the same period last year.