Bloomberg News

China Raises Rates to Counter Fastest Inflation Since 2008

July 06, 2011

(Adds context on interest-rate levels in other nations in sixth, seventh paragraphs.)

July 6 (Bloomberg) -- China raised benchmark interest rates for the third time this year, adding to efforts to cool the world’s fastest-growing economy after inflation accelerated to the quickest pace since 2008.

The one-year lending rate will increase to 6.56 percent from 6.31 percent tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate rises to 3.5 percent from 3.25 percent.

Stocks fell and oil and copper extended losses on concern that a slowdown in China will add to headwinds for the global economy. JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Merrill Lynch said the increase may be the last this year as analysts forecast that inflation will moderate after probably exceeding 6 percent last month.

The government’s appetite for tightening may “wane in response to evidence that the economy is slowing,” said Mark Williams, a London-based economist with Capital Economics Ltd. Inflation “is now widely expected to decline in the second half of the year,” he said.

Brent crude for August settlement on London’s ICE Futures Europe exchange dropped as much as $1.70 to $111.91 a barrel and traded at $112.19 at 1:03 p.m. local time. The Stoxx Europe 600 Index declined and Standard & Poor’s 500 Index futures also slid.

ECB, Federal Reserve

China’s increase will take effect on the day the European Central Bank is expected to raise its benchmark rate a quarter point to 1.5 percent. Elsewhere, emerging markets have outpaced advanced economies in raising rates, with South Korea, India, Chile, Brazil and Poland doing so in the past month.

In India, the repurchase rate is 7.5 percent, while the U.S. Federal Reserve has indicated no imminent plan to lift its benchmark from near zero.

China’s inflation accelerated to 6.2 percent in June, according to the median forecast in a Bloomberg News survey of economists before a report due next week. Consumer prices rose 5.5 percent in May, the most since July 2008, mainly driven by food costs.

“There’s no need to worry about a hard landing,” said Qu Hongbin, an economist with HSBC in Hong Kong. “Economic growth is moderating but it isn’t slowing sharply.”

Not all analysts agree that today’s increase is the last for the year, with Royal Bank of Scotland Group Plc forecasting two more.

Wen’s Difficult Target

Premier Wen Jiabao said last month that the government may fail to meet a full-year inflation target of 4 percent after the rate was 5.2 percent for the first five months.

“I see difficulties in reaching the full-year inflation target,” Wen said in comments in London, broadcast on June 27 by Hong Kong-based Cable TV. “But it still can be kept below 5 percent after the efforts we have made.”

China is reining in credit after record lending in 2009 fueled the nation’s economic rebound and increased the risk of real-estate bubbles and bad loans. The nation’s first audit of local-government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of 2010 and repayment risks.

The nation’s economy is in a “bit of a bubble” after officials waited too long to stem inflation, billionaire investor George Soros, 80, said June 14 at a conference in Oslo.

‘Controllable Range’

Wen wrote in the Financial Times on June 24 that efforts to stem inflation have worked and the pace of consumer-price increases will slow. “The overall price level is within a controllable range and is expected to drop steadily,” the premier said.

Besides raising rates, officials have boosted banks’ reserve requirements to record levels, restricted mortgages and home purchases, and allowed gains by the yuan against the dollar. A stronger currency can limit inflation by cutting import costs.

Twelve-month non-deliverable yuan forwards dropped 0.2 percent to 6.3914 per dollar before the rate increase, a 1.2 percent premium to the spot rate of the yuan of 6.4670 per dollar. The Shanghai market and Hong Kong trading had closed before the announcement.

Hazards for the Chinese economy include power shortages, a credit squeeze for small and medium-sized companies, and signs that export demand is weakening. Standard & Poor’s has cut the outlook for the nation’s property developers to “negative” on the likelihood of slower sales and lower prices.

Yum! Brands

Companies facing inflation pressures in China include Yum! Brands Inc., the owner of the KFC fast-food chain. The company said June 1 that rising wage costs will be offset by the boost from more people being able to afford its meals.

Analysts including Wang Tao, of UBS AG, say China is unlikely to suffer a “hard landing.” May data showed the economy maintaining momentum, with industrial production rising 13 percent and an acceleration in fixed-asset investment. A government plan to build millions of low-cost homes may also sustain growth.

The World Bank forecasts China’s gross domestic product will expand 9.3 percent this year, compared with 8 percent for India, 2.6 percent for the U.S. and 1.7 percent for the euro area.

--Zheng Lifei, Sophie Leung, Victoria Ruan, Paul Panckhurst, Huang Zhe, Nerys Avery. Editors: Paul Panckhurst,

To contact Bloomberg news staff for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net


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