The Chinese government further expanded its macroeconomic control policies this week in its latest effort to put the brakes on runaway growth. The Bank of China raised its one-year lending rate by 0.27 percentage points to 5.58%, marking the first interest rate hike in China in nearly a decade. The rate paid to depositors also increased by an equal margin to 2.25%.

 

The Bank of China said in a statement that the decision to raise interest rates reflects the need to "solidify achievements made by prior control measures" and more "effectively address" problems brought on by the breakneck pace of economic growth, which currently hovers around 9% a year. The announcement also emphasized the rate hike as another necessary step forward in the marketization of China's banking system.

 

While the measures that China took earlier this year to limit investment and restrict loans in the most scorching sectors of the economy have had some effect, problems with inflation have persisted. Real estate in large-to-mid sized cities have seen price increases ranging between 10% and 11% year-on-year in the third quarter of 2004. The consumer price index has exceeded 5% for four consecutive months between June and September.

 

Government and bank officials have publicly expressed concern that the economy could be overheating. The government hopes that the macroeconomic control policies will help China's economy avoid a hard landing. July 1995 was the last time the Bank of China lifted in benchmark lending rate. As a result, growth dropped dramatically from about 13% in 1994 to roughly 7% in 1999. Most economists believe that the current move to raise interest rates will curb growth only slightly. The surprise announcement from the Bank of China affected oil and commodity prices around the world, and caused squeamishness among traders in Japan and other markets.