The People's Bank of China, the country's central bank, decided on March 18 to increase the benchmark interest rate for deposits and loans with financial institutions by 0.27 percentage points. This adjustment brought the one-year loan rate and one-year deposit rate to 6.39% and 2.79%. This is the first time the central bank has adjusted the benchmark interest rate after raising the deposit reserve rate successively in 2007. To discuss these changes, People's Daily spoke to Ba Shusong, the deputy director of the Financial Center of China State Council's Development Research Center; Ha Jiming, chief economist of the International Finance Corporation; and Tang Min, the chief economist at the Asian Development Bank Resident Mission in China.

Interest rate increase expected

Q: Why did the central bank raise the interest rate?

Ba Shusong: Over a period of time, the central bank has adopted a single monetary policy, which has had a certain negative impact on the Chinese financial markets.

For example, the central bank has issued too many bonds. This has influenced the bond market, as well as impacted on the rate of return of commercial banks. In an effort to relieve the negative impact, the central bank also increased the reserve ratio. But neither has had a notable effect. Therefore, the central bank decided to increase the interest rate.

Ha Jiming: We fully expected this raise. Firstly, according to macroeconomic data, the rate of inflation exceeds the deposit rates, turning out to be negative; secondly, data indicates that monetary and credit growth have continued to accelerate, providing capital support to an investment rebound. In addition, the excessive growth of the credit and inflation rate has led to the rise of negative interest rates, which is not conducive to the consolidation of macro-controls and the development of the capital market. Therefore the interest rate increase will help consolidate the achievements of macroeconomic controls.

Min Tang: I think there are three reasons for this interest rate increase. Firstly, China's liquidity remains high; secondly, the consumer price index (CPI) is still high, which may cause inflation; thirdly, rate increases will play a role in slowing down the fast growth of the capital market, especially the soaring real estate prices.

Interest rate increase has little impact on China's economic development

Q: How will raising the interest rate impact on China's economy?

Ba Shusong: This interest rate increase will not have much of an effect on China's economy because people have talked about it for some time and its effect on the capital market has been partly digested in advance. After all, there are not so many people who raise money from financing. The main effect of the interest rate increase will be reflected in reduced investment in infrastructure, because the increase in interest rates will lead to the higher cost of funds and contain investment desire and expectation.

Ha Jiming: In the short term, there will be a certain degree of volatility in stock market prices. However, it is not necessarily due to interest rate increases. Psychological changes in investors will be the major reason. The current economic foundation is fairly good. We do not expect a significant wave due to a single policy adjustment. However, the impact of interest rates changes on enterprises will be quite obvious. Increases in financing costs will encourage enterprises to turn to other channels to raise money, such as the bond market, the stock market, et cetera. This will increase the proportion of direct financing and promote the development of financial markets. Generally speaking, this interest rate hike will have a limited impact on the real economy. It is expected that by increasing interest rates, China may slow its excess economic growth and prevent its economy from overheating. Since the rate of increment for interest rates is still lower than that of the inflation rate, the actual interest rate level is still low. China's real economic rate of return on investment remains high.

Tang Min: The small adjustment will have little impact on China's economy other than the psychological effect. Its influence on consumers will be weak. Savers will benefit more. Actually, the central bank has made several adjustments to send a clear signal to the market: it does not want an overheated economy.

There is little room for an interest rate increase

Q: Will the central bank continue raising the interest rates in 2007?

Ba Shusong: The interest rate increase demonstrates the diversity of the central bank's monetary policy tools. Now it has little room to continue raising the interest rates. From the perspective of the global environment, the United States might enter a period of interest rate cuts. From the perspective of the domestic market, China's central bank has to take into consideration four major factors: the consumer price index (CPI), producer price index (PPI), GDP deflator and the situation of commercial banks' business operation. At present, the CPI is increasing fast, but growth of PPI is more moderate. The rapid growth of credit in the first two months, to a very large extent, resulted from commercial banks' tradition of "early lending, early gains", and is expected to gradually slow.

Ha Jiming: The central bank might raise the interest rate one or two more times this year, once in the first half and once in the second half. It may also raise the statutory deposit reserve ratio two or three times this year. In addition, the State Administration of Foreign Exchange Company will set up a company specialized in foreign exchange administration, which will also help lower liquidity. Apart from the combination of monetary policy tools, there are other combinations of different policies, such as fiscal policies, that can better help solve the problem.

Tang Min: An increase of 0.27 percentage points in the one-year benchmark deposit rate is only a slight adjustment. The central bank is sending a signal. But this does not mean it will stop regulation and policy adjustment. No-one can rule out the possibility of the central bank raising the interest rate in the near future. If excess inflation and liquidity cannot be restrained in the next few months, the central bank is likely to raise interest rates again.

By People's Daily Online