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BIZCHINA / Weekly Roundup
Interest rate hikes an effective economic tool
By Yi Xianrong (China Daily)
Updated: 2007-08-24 11:41
For the fourth time this year, the People's Bank of China, the central
bank, raised interests rates on Wednesday.
The interest rate on bank deposits was raised by 27 basis points, and the
lending rate by 18 basis points. After the hikes, the benchmark one-year
deposit rate is now 3.6 percent while one-year lending rate is 7.02
percent.
The central bank said it raised the interest rate to "control money
supply and credit, and stabilize inflation expectation".
Judging from the series of moves by the monetary authorities, it is not
hard to detect the new preference of the decision-makers in choosing
policy tools. The frequent adjustments of the interest rate this year
indicate that the authorities are attaching more importance to it.
It is encouraging the central bank has resorted to the strongest tool in
the market to improve the efficiency of the country's monetary policy.
After the central bank raised the interest rates earlier this year, there
had been doubts on whether it would have any effect on the economy.
Some people said stock market indexes climbed after the interest rate
hike instead of slumping on the news. Property prices had the same
response. So these people concluded that interest rate hikes do not work
in Chinese financial market.
Such an opinion does not hold water. The previous rounds of interest
hikes did not have remarkable effects in cooling the economy because the
interest rate of China is too low considering its economic growth.
Interest rates decide where the financial resources are allocated. It
would only lose its effect when the rate does not reflect the real demand
and supply of the resources. When the interest rate is lower than
reasonable, it cannot function normally to guide the flow of financial
resources.
The repeated interest hikes are actually correcting the situation,
propelling the interest rate closer toward the reasonable level. Without
these rises, the interest rate would not become an effective policy tool
for controlling the economy, nor will the Chinese financial market get
mature.
After the National Bureau of Statistics released the latest indicators of
economic operation on August 13, the market had been expecting another
interest hike. After all, the annul growth in the consumer price index
(CPI) of 5.6 percent in July is a record high in a decade.
The Shanghai Composite Index climbed 0.5 percent to 4,980.07 on
Wednesday, the first day of the interest hike. The readiness of the
market for the hike has proven that the central bank's monetary policy
has become predictable for the market. The market and the monetary
authorities are building up some kind of interaction.
This understanding between the policy-makers and the market is precious,
for it marks a start of transparent, scientific and modern policy making
here.
The central bank raised the interest rate on deposits by 27 basis points
while the bank loan interests were lifted by 18 basis points. Thus, the
current difference between the interest rates of deposits and loans is
narrowed. In other words, the banks' profit margin has been reduced.
The central bank has obviously done so in the hope that the commercial
banks could make money from sharpening their competitive edge rather than
relying on the official interest difference.
(For more biz stories, please visit Industry Updates)
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