China Raises Again (July 20, 2007)

[HenryTo]

Another 27 bps on both the one-year lending and deposit rates. The PBOC will also cut taxes on interest paid in order to entice folks to keep money in their savings accounts.
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China boosts interest rates to cool economy

By Scott McDonald, Associated Press
BEIJING — China's central bank raised its key interest rates Friday, as the government tries to reel in its runaway economy and stem inflation worries.

A day after the government said the economy grew in the second quarter at its fastest pace since 1995, the central bank said it will raise its one-year yuan lending rate to 6.84% from 6.57%.

The one-year yuan deposit rate will go to 3.33% from 3.06%.

The changes take effect Saturday, the People's Bank of China said on its website.

The rate hikes were followed by China's State Council, or Cabinet, saying it will cut the tax paid on interest income to 5% from 20% beginning Aug. 15.

The cut may encourage Chinese investors to keep their money in banks rather than pumping it into the country's booming stock market.

The change was made "in line with the needs of national economic development," the council said.

Friday's interest rate increase is the fifth since April 2006.

"The rates will be conducive to guiding monetary credit and investment growth in a reasonable manner. They will regulate and stabilize inflation expectations and maintain stable price levels," the Bank of China said.

The bank last raised rates in mid-May.

Economist Stephen Green of Standard Chartered called the rate hikes "a widely anticipated moved after yesterday's super-fast GDP growth numbers."

Thursday, the National Bureau of Statistics reported that China's economy expanded 11.9% in the April-June quarter over the same quarter of 2006, even faster than the previous quarter's 11.1% growth.

Inflation also rose, with consumer prices climbing 4.4% in June. The economy also was under pressure from a swollen trade surplus and high energy consumption, the National Statistics Bureau said.

"We will further enhance and improve macro control and put into practice various policies set by the central government," Li Xiaochao, a statistics bureau spokesman, said at a news conference in announcing the figures Thursday.

China's communist leaders want fast growth to reduce poverty but are trying to cool some industries. They worry that runaway investment could push up inflation or ignite a debt crisis if borrowers default. Besides the interest rate hikes, they have also imposed investment curbs on some industries.

The rise in consumer prices, lifted by a 7.6% jump in food costs, was well above the official target of 3%.

Chinese leaders are worried about the political impact of rising food prices, which hit the poor, populous countryside especially hard.

Last week, Beijing increased its estimate of 2006 gross domestic product growth from 10.7% to 11.1%, bringing China closer to overtaking Germany as the world's third-biggest economy behind the United States and Japan.

[rffrydr]

They need more consumption and less savings ergo that strange 20% tax on money. Then it went into the stock market....back up.

Not unnoticed in the blossoming TIC data of last two months (and this one I believe we'll see) Chinese net liquidation on the order of 6B/month.
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