China Raises Rates to Counter Accelerating Inflation

China raised interest rates for the third time since mid-October ahead of a report forecast to show inflation accelerated to the fastest pace in 30 months.

The benchmark one-year lending rate will increase to 6.06 percent from 5.81 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will rise to 3 percent from 2.75 percent.

Oil and copper fell and emerging-market stocks extended losses on concern Premier Wen Jiabao’s campaign to contain consumer prices will slow the fastest-growing major economy. China joined India, Indonesia, Thailand and South Korea in boosting rates this year as Asian policy makers seek to avert economic overheating in the region leading the global rebound.

“Global markets may begin to see the frequent rate hikes as a sign that a growth slowdown in China is inevitable,” said Dariusz Kowalczyk, a Hong-Kong based economist at Credit Agricole CIB. “But in the end, the move will be seen as a sign of strength, with solid growth momentum allowing policy makers to raise rates.”

Copper for March delivery slid 3.8 cents, or 0.8 percent, to $4.537 a pound at 8:22 a.m. on the Comex in New York after reaching a record yesterday.

Photographer: Nelson Ching/Bloomberg

The People's Bank of China in Bejing. Close

The People's Bank of China in Bejing.

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Photographer: Nelson Ching/Bloomberg

The People's Bank of China in Bejing.

Yuan Climbs

In offshore trading in Hong Kong, the yuan climbed 0.1 percent to 6.5555 per dollar. Non-deliverable forwards strengthened 0.2 percent to 6.4275, signaling a gain of 2.6 percent in the next 12 months from the Shanghai close of 6.5938.

The central bank moved on the last day of a week-long holiday and before a report next week that may show consumer prices rose 5.3 percent in January, according to the median estimate in a Bloomberg News survey of economists.

Isaac Meng, a Beijing-based economist for BNP Paribas, said he expected “accelerated tightening” that would see rates rise by as much as another 1.5 percentage points. Before the financial crisis, the one-year lending rate was 7.47 percent, 1.41 percentage points higher than the level announced today.

Annual inflation of 4.6 percent in December was three times the pace of that of the U.S. At the same time, it was less than half Argentina’s 10.9 percent and lagged behind the most recent rates in the other so-called BRIC nations of Brazil, Russia and India. Among Group of 20 nations, China was also behind Indonesia, Saudi Arabia and Turkey.

Surging Lending

A drought that’s threatening grain output and a New Year surge in lending are adding to inflation risks after money supply jumped more than 50 percent in two years. Economic growth accelerated in the fourth quarter to a 9.8 percent annual pace.

Besides increases in rates and banks’ reserve requirements, Wen’s campaign spans sales of state-food reserves, subsidies for low-income earners, and crackdowns on speculation and hoarding.

In today’s move, the central bank raised long-term rates for deposits by more than for lending. For savers, the increase was 45 basis points for five-year terms.

“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams, a London-based economist at Capital Economics Ltd.

China’s 0.75 percentage point of increases in one-year rates since the global financial crisis compare with India raising borrowing costs seven times for a total of 1.75 percentage points. In South Korea, where policy makers will meet this week to decide on rates, borrowing costs climbed 0.75 percentage point so far.

‘Policy Trap’

China is among Asian countries that risk being caught in a “policy trap” by not raising interest rates fast enough to curb inflationary pressures, Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd., said yesterday.

“So far, the Chinese leadership has adopted a measured approach to inflation,” Roach said. “The mix of Chinese policy tightening, however, needs to shift much more decisively toward higher interest rates. With the Chinese economy still growing at close to 10 percent per year, the government can afford to take more short-term policy risk.”

Companies from Baoshan Iron & Steel Co. to Starbucks Corp. and McDonald’s Corp. have raised prices. While wages are also climbing, Chinese consumers are more concerned about inflation than at any time in the past decade, according to a central bank survey released in December.

Government Target

China’s government aims to hold inflation at 4 percent this year, state broadcaster CCTV reported in December. Officials also want to limit the risk of property bubbles in an economy awash with cash.

China’s foreign-exchange reserves, the world’s biggest, climbed by a record $199 billion in the fourth quarter to $2.85 trillion, and banks extended 7.95 trillion yuan ($1.2 trillion) of new loans last year, exceeding the government’s targeted maximum of 7.5 trillion yuan.

New lending may have surged to 1.2 trillion yuan in January, according to the median estimate in a Bloomberg News survey of analysts. In December, the amount was only 481 billion yuan, a difference that highlights a pattern of banks lending more at the start of each year.

The government knows January’s inflation number will “look ugly” and wants to be seen taking action in the lead-up to the annual meeting of the National People’s Congress, the country’s lawmaking body, in early March, said Ma Jun, Deutsche Bank AG’s chief China economist.

The nation’s inflation is largely being driven by food costs. Drought hitting parts of the country may cut grain output and undermine efforts to stabilize prices, Premier Wen said in comments reported by the state-run Xinhua News Agency last week.

Last month, a jump in consumer spending ahead of the Lunar New Year holiday and bad weather that damaged crops may have contributed to a higher inflation reading.

--Li Yanping, Kevin Hamlin, Marco Lui, Shamim Adam. Editors: Paul Panckhurst, Josh Fellman.

To contact the Bloomberg News staff on this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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