The People's Bank of China, the country's central bank, announced on October 29 that it would raise both lending and deposit interest rates by 0.27 percentage points. The one-year deposit interest rate will increase to 2.25 percent, while the one-year lending interest rate will rise to 5.58 percent.

This long awaited adjustment has met with different responses from groups both at home and abroad, but how will ordinary Chinese people react to it?

The increase aims to curb, to some extent, the overheated economy and to reduce inflation. Of course, it will also enhance purchasing power. So a "wealth effect" can follow, i.e. people feel wealthier, so feel able to buy more.

Due to previous low deposit interest rates, people have had little reason to save. RMB deposits increased 2.7 trillion yuan in the first nine months of this year, 499 billion down on the equivalent period of 2003. Domestic savings, which had shown negative growth for eight consecutive months, increased 1.2 trillion yuan during the same time, a decrease of 207 billion on the previous year.

Since the adjustment was announced last Friday, banks say they have been busy with people depositing money or withdrawing their savings to re-deposit them as one-year or longer fixed deposits to take advantage of the change.

"The interest rate adjustment can help increase residents' interest income, especially in the medium and long term, because the adjustment for medium and long-term interest rates will be larger than that for short-term rates," said a spokesman for the central bank.

On October 29, shares in Shanghai Stock Exchange and Shenzhen Stock Exchange dropped sharply.

Theoretically, an increase in interest rates can discourage investment in stocks, according to Wang Yongjun, head of the Finance and Economics Institute of the Central University of Finance and Economics.

However, Wang added, since the stock market is influenced by many factors, small short-term interest rate hikes shouldn't exert too much influence and any effects should be easy to recover from.

Treasury bonds have met with great popularity since the increase was announced. Bonds in many banks such as the Industrial and Commercial Bank, Construction Bank and Beijing City Commercial Bank were soon sold out after their second issue this year on Monday.

According to Ministry of Finance rules, bond interest rates are pegged to those of savings, meaning the rate for three and five-year bonds were raised to 3.37 and 3.81 percent respectively.

Insurance could also be affected by the adjustment. According to rules of the China Insurance Regulatory Commission, the compound interest from insurance products cannot exceed 25 percent each year. After the increase, interest income has nearly equaled that of insurance products. However, since saving is safer, there are likely to be fewer policyholders and some policy cancellations.

Long time low interest rates have also caused money to flow into the real estate sector, but after the hike the interest rate for accumulation fund loans of five years and over will increase to 4.23 percent, while the rate for private housing loans of five years and over will rise to 5.31 percent.

According to an official from the Agricultural Bank of China in Guangdong Province, more people are paying off their housing loans in advance, since less investment options make this the wisest use of their money.

(China.org.cn by Yuan Fang November 9, 2004)