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Christine Chan

Elaine Chan

Central bank expected to bring in rise of 0.5 percentage points after the holiday

China's central bank is understood to have decided to raise interest rates after an emergency meeting was held yesterday to discuss measures to curb investment growth.

Commercial banking sources said the People's Bank of China (PBOC) would raise lending rates by 50 basis points - or 0.5 percentage points. The new rate would come into effect after the week-long May Day holiday, the bankers said. They added that PBOC officials had also informed them that they were considering a 0.25 percentage point rise in deposit rates.

PBOC spokesman Sun Zhuzhang declined to comment yesterday, saying 'any announcement will be posted on our website'.

Word of the rate rise, which would be China's first in nine years, comes on the heels of administrative measures implemented this week to temporarily stop new lending. China's current one-year lending rate is 5.31 per cent and its one-year deposit rate 1.98 per cent.

'The macro-economic measures are not having their intended effect,' one banker said. 'There's a need to strengthen controls.'

The official Shanghai Securities News yesterday quoted Li Yang, director of the Chinese Academy of Social Sciences' finance research institute, as saying that an interest rate adjustment was inevitable if measures introduced to cool the economy did not prove effective.

Market expectations of an increase in interest rates depressed prices of China's benchmark seven-year bonds, pushing yields to a new high. The Shanghai A-share index slipped 1.7 per cent; its Shenzhen counterpart fell 2.3 per cent.

In Hong Kong, the Hang Seng Index gave up 1.31 per cent and finished just above the key 12,000 support level, although this was breached during trading.

All H-shares fell, with 24 of 37 index stocks dropping more than 5 per cent. But with some big oil stocks holding up relatively well, the overall H-share index managed to limit its losses to 4.5 per cent.

Fears of an economic slowdown on the mainland also spread to global commodities markets overnight Wednesday. Regional markets were sharply lower yesterday, with commodities, mining, steel and transport stocks leading falls.

'Markets have been slow to acknowledge the fact that the growth [China is] enjoying is unsustainable,' said Stewart Paterson, chief Asian strategist at Credit Suisse First Boston. 'I think what is happening now is that people are realising that the second half of the year is going to see substantially lower economic growth, and obviously it is generally the cyclical sectors which are being sold down.'

Over the past week, China's top leaders have intensified their efforts to rein in overinvestment on fears that it could fuel inflation, with Premier Wen Jiabao warning that 'very forceful' measures were needed to control overheating.

Additional reporting by Anette Jonsson



Mainland interest rates 'set to increase'