China would raise one-year deposit and loan interest rates by 0.27 and 0.18 percentage points respectively, to 3.06 percent and 6.57 percent as of May 19, the People's Bank of China announced on Friday.

 

The central bank will also raise the reserve requirement ratio for commercial banks by 0.5 percentage point to 11.5 percent as of June 5.

 

This is the first time in 10 years that the central bank has simultaneously raised the benchmark interest rates and the bank reserve ratio.

 

The move aims to "strengthen liquidity management in the banking system, rationalize the growth of lending and investment and maintaining price stability", the central bank said in a statement on its website.

 

"The problems currently facing China's economy are so complex that a single adjustment cannot on its own accomplish all the objectives of macro control policy", said Wang Tongsan, a researcher with the Chinese Academy of Social Sciences (CASS).

 

"Raising the interest rates and bank reserve ratio at the same time will help prevent the fast growing economy from overheating and ensure economic stability", said Wang.

 

"The decision is reasonable and within people's expectations", said Yin Jianfeng, a CASS financial expert.

 

"By doing so, the central bank attempts to impose curbs on excessive investment and the speculative bubble on the stock market, but it is too early to say whether the move will be effective", said Yin.

 

China has raised interest rates five times since 2004 and the bank reserve ratio eight times since 2006.

 

But the country's urban fixed asset investment was 2.26 trillion yuan (US$290 billion) in the first four months of this year, up 25.5 percent from the same 2006 period, according to the National Bureau of Statistics.

 

The figure compares with a 25.3 percent rise in the first quarter and last year's growth rate of 24.5 percent, suggesting there had been no fundamental changes in the overall trend in the country's investment growth.

 

Meanwhile, newly-added outstanding loans surged to 1.42 trillion in the first quarter, 13 percent up from the same period last year and almost half of the quota set by the central bank for the whole year.

 

"As far as the central bank is concerned, the economy is moving too quickly. There is too much lending and too much liquidity, which is why it has adopted a series of austerity measures," said Hu Yuhang, an analyst with CITIC Securities.

 

As Chinese shares continuously hit new highs, the mainland's two bourses saw their market value surpassing the country's savings deposits on May 17.

 

"We can wait and see whether the interest rate rise brings people's money back from the stock market into their bank accounts", said Yin.

 

"That's possible, but hardly probable", he added.

 

(Xinhua News Agency May 19, 2007)