Gov bumps benchmark interest rates to rein in CPI

Analysts say the government's sudden decision might mean the March consumer price increase exceeded forecasts. CFP Photo

The People’s Bank of China, the central bank, announced Tuesday it would raise the benchmark one-year borrowing and lending interest rates by 25 points beginning Wednesday.

This was the second increase in benchmark interest rates this year and the fourth since the start of 2010.

After the increases, the one-year deposit interest rate will climb to 3.25 percent while the one-year loan interest rate will reach 6.31 percent.

Analysts said the move was a sign of the government’s ongoing effort to ease stubborn consumer price rises. However, the sudden decision might mean the March consumer price increase exceeded the government’s forecast.

The consumer price index (CPI), a major gauge of inflation, jumped 4.9 percent in February from one year earlier, exceeding the government’s full-year target of 4 percent.

Across the country, price pressures are mounting.

Food prices, which account for one-third of the goods used to calculate CPI, surged 11 percent year on year in February.

“It’s widely expected that March data will show the CPI has hit a new high. The interest rate rise is the central bank’s advanced response to rising inflation pressures,” said Liu Yuhui, an economist at the Chinese Academy of Social Sciences, a government think tank.

Rising oil and commodity prices on the global market will continue to push prices higher throughout the year, said Lu Zhengwei, chief economist of the Industrial Bank.

Lu said he expected the country’s CPI growth to reach a new high of 5.2 percent in March, the fastest pace since July 2008. He said he anticipated two or three more benchmark interest rate hikes during the remaining months of 2011.

“The timing of the increase, during a holiday and before the announcement of economic data, will help to minimize impact in the markets,” said Han Fuling, a researcher at the Beijing-based Central University of Finance and Economics.

The Shanghai and Shenzhen bourses were closed between April 3 and 5 for the Tomb Sweeping Festival.

The National Bureau of Statistics is scheduled to release the March economic data, including the CPI, industrial production and fixed asset investments, on April 15.

The government prioritized price stability in this year’s work report and stepped up efforts to bring inflation under control.

The recent rapid price increases conflict with government policies. Chinese Premier Wen Jiabao compared inflation to a tiger: “Once it gets free, it’s difficult to put it back into the cage,” he told reporters last month.

To mop up the excessive liquidity that fuels inflation, the central bank has raised the reserve requirement ratio for commercial banks nine times since the beginning of last year.

The value of new loans issued by Chinese banks in February fell to 535.6 billion yuan from January’s 1.04 trillion yuan.

In addition to monetary tools, the government boosted production, lowered transportation fees for some farm produce and worked to investigate and punish price speculation and hoarding.

Analysts said China’s incessant interest rate hikes and the government’s policies to cool home price growth would work together to discourage property speculation.

“There is no sign the government will relent in its property regulation campaign, leaving real estate developers no other choice but turning to discount promotions,” said Changjiang Securities analyst Su Xuejing.

Su said the measures would not only discourage property speculators, but also home-buyers who want to improve their living standards, leading to a sharp fall in property turnovers in some large cities.

(Xinhua)

Loosened yuan bond market – McDonald’s sets benchmark for China with yuan bond sale

McDonald’s Corp’s yuan bond sale, the first by a foreign company in Hong Kong, may pave the way for a new global debt market as China seeks to capitalize on its status as the engine of the world’s economic recovery.

McDonald's has expanded faster in China than anywhere outside the US. IC Photo

McDonald’s, which opened its first 1,000 restaurants faster in China than in any other country outside the US, sold 200 million yuan of 3 percent notes due in September 2013. Bentonville, Arkansas-based Wal-Mart Stores, the world’s largest retailer, said in March it was considering selling bonds in yuan.

As the fastest-growing major economy, China changed its rules in February to let foreign companies issue yuan-denominated bonds through Hong Kong to strengthen its position as a financial center and promote the Chinese currency for global commerce.

Yuan bonds issued by Chinese companies have returned 6 percent this year, their best performance since 2005, according to a Bank of America Merrill Lynch index tracking 1.38 trillion yuan of debt.

“This is going to become a popular trend,” said Donald Straszheim, a Los Angeles-based senior managing director and head of China research at International Strategy & Investment Group. “There are hundreds of global companies wanting to do more business in China and they will want to be involved in the country’s evolving credit market.”