Source AP ©

China raises interest rates for 5th time in 2007

Despite all signs show that raising interest rates has little effect to cool the sizzling economy, China has done it for the 5th time this year in a bid to curb rising inflation.

The interest rate on a one-year loan will rise by 0.27 percent to 7.29 percent as of Saturday, the Central Bank said. Rates paid on bank deposits also will rise by a similar margin to 3.87 percent.

A rate hike was widely expected after the government said this week that inflation rose to an 11-year high in August of 6.5 percent, driven by a surge in politically sensitive food prices.

"China is ratcheting up the pace of its monetary tightening," Jing Ulrich, chairwoman of China equities for JP Morgan, said in a report to clients.

"We expect at least one more rate increase in the next six months," Ulrich said. "Inflation risks are on the rise in China, sparked by structural changes in the demand-supply situation for foodstuffs, as well as excess liquidity on the back of the widening trade surplus."

Chinese leaders want to maintain high growth to reduce poverty but worry that the current boom, fueled by exports and investment, could push inflation to dangerous levels or ignite a financial crisis.

The economy has powered ahead despite repeated rate hikes, investment curbs and measures to shrink credit, as well as global worries about the U.S. economy.

The economy grew by 11.9 percent in the last quarter, and the World Bank this week raised its forecast for the full year's expansion by almost a full percentage point to 11.3 percent.

Also Friday, the government said spending on factories, real estate and other urban assets in the first eight months of the year rose 26.7 percent from the same period last year.

"This round of macroeconomic controls has continued for over four years. The relevant agencies have introduced many policy measures. But the effects haven't been obvious," the main Communist Party newspaper People's Daily said Friday.

The last rate increase was Aug. 22. The communist government also has tried to shrink lending by repeatedly raising the amount of money banks must set aside in reserves.

But economists question whether such small increases in interest rates will have any impact. Many Chinese companies finance investments out of revenues rather than with bank loans, so interest rate changes have no direct effect on them.

The reserve rate rises are more than offset by the torrent of new deposits pouring into banks as booming exports send cash flooding through the economy.

The country's swollen trade surplus jumped nearly 33 percent in August to US$24.97 billion, its second-highest monthly level on record, according to the government.

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