China touches the interest brakes

China touches the interest brakes
Published: 29 October 2004

China’s central bank raised interest rates Thursday for the first time in nearly a decade, signaling a deep unease with the breakneck pace of development and an intent to curb a construction boom that is sowing fears of runaway inflation.

The unexpected announcement by the People’s Bank of China drove down oil and commodity prices, as well as the stocks of mining and metals companies worldwide, with the expectation that China’s voracious appetite for raw materials will wane as its economy tightens. The bank yesterday raised its one-year lending rate by 0.27 percentage points, to 5.58 percent, effective Friday, while rates paid to depositors in Chinese banks would go up by an equal margin, to 2.25 percent.

Analysts construed the announcement as a clear signal that China’s leaders are intensifying efforts to cool the economy when a surfeit of new factories, office towers and residential development has outstripped the supply of raw materials and energy. Some expect more increases in coming months as the central bank seeks to slow new investment.

"This is the beginning of a long tightening process," said Dong Tao, China economist at Credit Suisse First Boston in Hong Kong. "The economy must be slowed because it’s currently running at an unsustainable level."