Enviado: 28/4/2006 8:19China May Take Further Steps to Cool Investment Boom (Update5)
April 28 (Bloomberg) -- China, which unexpectedly raised its benchmark lending rate yesterday, may take additional steps to cool investment in factories and property in the world's fastest- growing major economy.
People's Bank of China Governor Zhou Xiaochuan may raise borrowing costs again this year, four of seven economists surveyed by Bloomberg News said. The bank may also order lenders to set aside more money as reserves while policy makers restrict land use for factories and real estate development, some economists said.
China, the world's biggest consumer of steel and the second- largest user of oil, is trying to curtail an investment boom that the World Bank says increases the risk of a sudden slowdown in the economy. At the same time, the government doesn't want to choke consumer spending, which it's counting on to sustain growth as China curbs its reliance on exports.
``The People's Bank of China will follow the decision with additional moves,'' said David Simmonds, global head of currency research at Royal Bank of Scotland Plc in London. He predicts it will seek to discourage lending growth by increasing the ratio of deposits that commercial banks must set aside.
The central bank raised its one-year lending rate by 0.27 percentage point to 5.85 percent in its first increase since October 2004. The bank also asked the nation's banks to restrict lending.
Zhou, 58, today called the increase a ``moderate adjustment'' and said it was aimed at preventing the economy overheating. He was speaking at a central bank financial forum in Beijing.
Commodities, Stocks Fall
The central bank left its one-year deposit rate unchanged at 2.25 percent, seeking to encourage consumer spending and avoid gains in its currency, the yuan. Higher deposit rates would attract funds from overseas, increasing demand for yuan.
Commodity prices tumbled on concern that slower growth in China would curtail demand. Copper, which has doubled in the past year, dropped as much as 3.1 percent. Zinc fell as much as 7.3 percent, its biggest decline since February. Oil, which has climbed 38 percent in the past 12 months, fell 1.3 percent.
Stocks fell in China, Japan, Australia and South Korea. BHP Billiton, the world's largest mining company, slipped 2.2 percent in Sydney and Rio Tinto Group, the third-biggest miner, fell 1.9 percent. The Shanghai Composite Index dropped 1.6 percent as of 9:32 a.m. local time.
The yield on the 4.44 percent local currency bond due in February 2015 rose 3 basis points to 3.10 percent. The yield jumped 30 basis points, or 0.3 percentage point, since March 20.
U.S. stocks rebounded after Federal Reserve Chairman Ben S. Bernanke suggested the central bank may soon pause in its cycle of interest-rate increases. The Standard & Poor's 500 Index added 4.31, or 0.3 percent, to 1309.72 after falling as much as 0.8 percent.
Reserve Requirement
The Chinese central bank wasn't expected to raise its benchmark rate because inflation is subdued, said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. Consumer prices climbed 0.8 percent last month from a year earlier. The central bank predicts inflation of 2 percent for the full year.
Instead, economists expected China's central bank to increase the ratio of deposits it requires banks to lodge with it, currently 7.5 percent. Raising that ratio would discourage bank lending, said Simmonds.
``We had anticipated that the reserve requirement would be the first type of move as opposed to interest rates,'' said Kathleen Stephansen, director of global economics at Credit Suisse Holdings. ``So in that respect, it was somewhat surprising.''
New yuan lending in China jumped 70 percent in the first quarter from a year earlier, fueling almost 30 percent growth in investment in factories, roads, mines and real estate. Lending is growing ``too fast,'' the central bank said yesterday.
Administrative Restrictions
The lending and deposit rates are government-set guidelines for the nation's commercial banks. At present, banks may charge borrowers 10 percent below the benchmarks or any higher rates at their discretion.
Premier Wen Jiabao may also use measures that directly target investment, such as limits to lending on certain projects and restrictions on land use, economists said.
The government cracked down on lending in April 2004 after growth in fixed-asset investment topped 50 percent in February that year. Investment growth fell by half by February 2005, only to rebound later in the year as restrictions were eased.
Fixed-asset investment in urban areas surged almost 30 percent in this year's first quarter. Money supply growth has beaten the central bank's 16 percent target for 10 months.
Accelerating lending and investment increase the danger of a sudden slowdown in China, Homi Kharas, chief economist for East Asia and the Pacific at the World Bank, said on April 20. China's economic growth has averaged 10 percent over the past three years.
`Knock-on Effect'
``There is the risk the investment boom in China turns to bust and that would have a knock-on effect on the rest of the world,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Higher rates may take off some of the froth from commodities markets, which have benefited from the investment boom.''
Hu and Premier Wen face the task of curbing credit and investment growth without hurting consumer spending. In a five- year economic plan announced in October, China's government set as its key goal increasing consumption while moving away from dependence on exports and investment.
Stronger consumer spending would also increase the nation's demand for imports, reducing its trade surplus. That would help alleviate the global imbalances that were the subject of a meeting of Group of Seven finance ministers and central bankers in Washington last weekend.
``I do see some encouragement that the Chinese are at least talking about the issues,'' Bernanke told U.S. lawmakers today. The Chinese ``are discussing some approaches to increase domestic consumption and reduce the amount of savings they have put into the world capital markets.''
Yuan Gains
U.S. lawmakers argue the Chinese yuan is kept artificially weak to give exporters an advantage, contributing to the nation's $201.6 billion trade deficit with China last year. China's currency reserves of $875.1 billion are the world's largest.
Still, yesterday's interest-rate decision indicates the central bank won't use currency appreciation as a way of cooling its economy, said Qing Wang, a strategist at Bank of America.
``In this light, we believe the pace of appreciation will likely be rather moderate in the coming weeks,'' Qing said in a note to clients.
The yuan has gained 1.2 percent against the dollar since a 2.1 percent revaluation on July 21 last year, when China abandoned a decade-old peg. The yuan is a denomination of China's currency, the renminbi.
Chinese President Hu Jintao, visiting U.S. President George W. Bush last week, said China will ``continue to make adjustments'' to its currency system, stopping short of promising faster appreciation.
Bad Loans
Yesterday's decision will lift profit margins at Chinese banks, which are saddled with 1.31 trillion yuan of bad loans, by increasing the difference between the rates at which they can lend and borrow. Chinese authorities are concerned that banks are ill- equipped to handle a more flexible currency, economists say.
Shares of China Merchants Bank Co. and other publicly traded banks surged today. Merchants Bank shares gained as much as 4.9 percent, and shares of China Minsheng Banking Corp. rose as much as 4.8 percent.
Zhou, who holds a doctorate in economic engineering from Beijing's Tsinghua University and speaks fluent English, has been credited by economists including Jonathan Anderson at UBS AG with helping create a more technically competent central bank.
The rate increase came earlier in China's economic cycle than the previous one, suggesting the central bank is taking a more active part in guiding the economy, Hong Liang, an economist Goldman Sachs Group Inc., said in note to clients.
``Such an early and decisive policy adjustment will indeed strengthen the credibility of the central bank, and give investors more confidence,'' she wrote.
April 28 (Bloomberg) -- China, which unexpectedly raised its benchmark lending rate yesterday, may take additional steps to cool investment in factories and property in the world's fastest- growing major economy.
People's Bank of China Governor Zhou Xiaochuan may raise borrowing costs again this year, four of seven economists surveyed by Bloomberg News said. The bank may also order lenders to set aside more money as reserves while policy makers restrict land use for factories and real estate development, some economists said.
China, the world's biggest consumer of steel and the second- largest user of oil, is trying to curtail an investment boom that the World Bank says increases the risk of a sudden slowdown in the economy. At the same time, the government doesn't want to choke consumer spending, which it's counting on to sustain growth as China curbs its reliance on exports.
``The People's Bank of China will follow the decision with additional moves,'' said David Simmonds, global head of currency research at Royal Bank of Scotland Plc in London. He predicts it will seek to discourage lending growth by increasing the ratio of deposits that commercial banks must set aside.
The central bank raised its one-year lending rate by 0.27 percentage point to 5.85 percent in its first increase since October 2004. The bank also asked the nation's banks to restrict lending.
Zhou, 58, today called the increase a ``moderate adjustment'' and said it was aimed at preventing the economy overheating. He was speaking at a central bank financial forum in Beijing.
Commodities, Stocks Fall
The central bank left its one-year deposit rate unchanged at 2.25 percent, seeking to encourage consumer spending and avoid gains in its currency, the yuan. Higher deposit rates would attract funds from overseas, increasing demand for yuan.
Commodity prices tumbled on concern that slower growth in China would curtail demand. Copper, which has doubled in the past year, dropped as much as 3.1 percent. Zinc fell as much as 7.3 percent, its biggest decline since February. Oil, which has climbed 38 percent in the past 12 months, fell 1.3 percent.
Stocks fell in China, Japan, Australia and South Korea. BHP Billiton, the world's largest mining company, slipped 2.2 percent in Sydney and Rio Tinto Group, the third-biggest miner, fell 1.9 percent. The Shanghai Composite Index dropped 1.6 percent as of 9:32 a.m. local time.
The yield on the 4.44 percent local currency bond due in February 2015 rose 3 basis points to 3.10 percent. The yield jumped 30 basis points, or 0.3 percentage point, since March 20.
U.S. stocks rebounded after Federal Reserve Chairman Ben S. Bernanke suggested the central bank may soon pause in its cycle of interest-rate increases. The Standard & Poor's 500 Index added 4.31, or 0.3 percent, to 1309.72 after falling as much as 0.8 percent.
Reserve Requirement
The Chinese central bank wasn't expected to raise its benchmark rate because inflation is subdued, said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. Consumer prices climbed 0.8 percent last month from a year earlier. The central bank predicts inflation of 2 percent for the full year.
Instead, economists expected China's central bank to increase the ratio of deposits it requires banks to lodge with it, currently 7.5 percent. Raising that ratio would discourage bank lending, said Simmonds.
``We had anticipated that the reserve requirement would be the first type of move as opposed to interest rates,'' said Kathleen Stephansen, director of global economics at Credit Suisse Holdings. ``So in that respect, it was somewhat surprising.''
New yuan lending in China jumped 70 percent in the first quarter from a year earlier, fueling almost 30 percent growth in investment in factories, roads, mines and real estate. Lending is growing ``too fast,'' the central bank said yesterday.
Administrative Restrictions
The lending and deposit rates are government-set guidelines for the nation's commercial banks. At present, banks may charge borrowers 10 percent below the benchmarks or any higher rates at their discretion.
Premier Wen Jiabao may also use measures that directly target investment, such as limits to lending on certain projects and restrictions on land use, economists said.
The government cracked down on lending in April 2004 after growth in fixed-asset investment topped 50 percent in February that year. Investment growth fell by half by February 2005, only to rebound later in the year as restrictions were eased.
Fixed-asset investment in urban areas surged almost 30 percent in this year's first quarter. Money supply growth has beaten the central bank's 16 percent target for 10 months.
Accelerating lending and investment increase the danger of a sudden slowdown in China, Homi Kharas, chief economist for East Asia and the Pacific at the World Bank, said on April 20. China's economic growth has averaged 10 percent over the past three years.
`Knock-on Effect'
``There is the risk the investment boom in China turns to bust and that would have a knock-on effect on the rest of the world,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Higher rates may take off some of the froth from commodities markets, which have benefited from the investment boom.''
Hu and Premier Wen face the task of curbing credit and investment growth without hurting consumer spending. In a five- year economic plan announced in October, China's government set as its key goal increasing consumption while moving away from dependence on exports and investment.
Stronger consumer spending would also increase the nation's demand for imports, reducing its trade surplus. That would help alleviate the global imbalances that were the subject of a meeting of Group of Seven finance ministers and central bankers in Washington last weekend.
``I do see some encouragement that the Chinese are at least talking about the issues,'' Bernanke told U.S. lawmakers today. The Chinese ``are discussing some approaches to increase domestic consumption and reduce the amount of savings they have put into the world capital markets.''
Yuan Gains
U.S. lawmakers argue the Chinese yuan is kept artificially weak to give exporters an advantage, contributing to the nation's $201.6 billion trade deficit with China last year. China's currency reserves of $875.1 billion are the world's largest.
Still, yesterday's interest-rate decision indicates the central bank won't use currency appreciation as a way of cooling its economy, said Qing Wang, a strategist at Bank of America.
``In this light, we believe the pace of appreciation will likely be rather moderate in the coming weeks,'' Qing said in a note to clients.
The yuan has gained 1.2 percent against the dollar since a 2.1 percent revaluation on July 21 last year, when China abandoned a decade-old peg. The yuan is a denomination of China's currency, the renminbi.
Chinese President Hu Jintao, visiting U.S. President George W. Bush last week, said China will ``continue to make adjustments'' to its currency system, stopping short of promising faster appreciation.
Bad Loans
Yesterday's decision will lift profit margins at Chinese banks, which are saddled with 1.31 trillion yuan of bad loans, by increasing the difference between the rates at which they can lend and borrow. Chinese authorities are concerned that banks are ill- equipped to handle a more flexible currency, economists say.
Shares of China Merchants Bank Co. and other publicly traded banks surged today. Merchants Bank shares gained as much as 4.9 percent, and shares of China Minsheng Banking Corp. rose as much as 4.8 percent.
Zhou, who holds a doctorate in economic engineering from Beijing's Tsinghua University and speaks fluent English, has been credited by economists including Jonathan Anderson at UBS AG with helping create a more technically competent central bank.
The rate increase came earlier in China's economic cycle than the previous one, suggesting the central bank is taking a more active part in guiding the economy, Hong Liang, an economist Goldman Sachs Group Inc., said in note to clients.
``Such an early and decisive policy adjustment will indeed strengthen the credibility of the central bank, and give investors more confidence,'' she wrote.
