China Raises Rates for Fifth Time to Cool Economy

China raised interest rates for the fifth time since March to curb the fastest inflation since 1996 and damp speculation in stocks and real estate.

The benchmark one-year lending rate will increase to a nine-year high of 7.29 percent from 7.02 percent, starting tomorrow, the central bank said today on its Web site. The rate has risen from 6.12 percent on March 17.

China is flooded with cash from a trade surplus that reached a record $161.8 billion in the first eight months of this year, pushing up consumer prices at twice the central bank's target pace and raising the risk of asset bubbles. Premier Wen Jiabao is trying to cool the world's fastest-growing major economy without triggering a sudden slowdown that may cost jobs and leave factories idle.

``The government's biggest concern is inflation,'' said San Feng, an economist with the State Information Center in Beijing. ``It means that people get negative returns on bank deposits, and that's fueling investment and bubbles in the stock and property markets.''

The central bank said it wants to strengthen monetary and credit controls, guide investment growth and stabilize inflation expectations. The one-year deposit rate will rise to 3.87 percent from 3.6 percent.

Rates are likely to rise once more this year, said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., Glenn Maguire, chief Asia economist at Societe Generale SA, and Jing Ulrich, chairman of China equities at JPMorgan Chase & Co.

The previous increase was less than a month ago.

Credit Squeeze

China's action contrasts with efforts by central banks around the world to boost liquidity because of a credit squeeze linked to soured home loans in the U.S. The European Central Bank and Bank of Japan delayed planned interest-rate increases, and economists expect the Federal Reserve to cut borrowing costs next week.

Contagion from the highest delinquency rate on U.S. mortgages in five years has triggered a slump in demand for asset-backed securities and driven up borrowing costs for banks. Northern Rock Plc said today it is receiving emergency funding from the Bank of England in the biggest bailout of a British lender in 30 years, because it was unable to finance itself in money markets.

`Out of Control'

China wants ``to prevent inflation expectations from getting out of control'' and stem inflows into an overheated equity market, said Julian Jessop, an economist at Capital Economics Ltd. in London. Stocks ``might wobble on this announcement, but the wider economic impact should be negligible.''

The benchmark CSI 300 Index has quadrupled in the past 12 months. House prices in 70 major cities rose 8.2 percent in August from a year earlier.

The world's fourth-biggest economy expanded 11.9 percent in the second quarter from a year earlier and is forecast by the International Monetary Fund to be the biggest contributor to global growth this year.

Soaring food costs pushed inflation to 6.5 percent in August, more than double the 3 percent annual target of the People's Bank of China.

Rising consumer prices make it harder for the government to curb asset bubbles. Households invest in shares and property instead of letting inflation erode the value of bank deposits. The government reduced a tax on interest income to 5 percent from 20 percent last month to make savings more attractive.

Quicker Yuan Gains

The pace of yuan appreciation may quicken as the government tackles high inflation and growth in the money supply, said Craig Chan, a Singapore-based currency strategist at Lehman Brothers Asia Ltd. That would make exports more expensive and help to slow the flow of cash into the economy.

``This is an opportunity to trade and go long on the yuan, not just against the dollar, but against other currencies,'' said Chan. The currency ``could overshoot'' Lehman's year-end forecast of 7.45 per dollar. The yuan closed today at 7.5160.

The currency has gained about 10 percent against the dollar since the end of a fixed ex...

China Raises Rates for Fifth Time to Cool Economy

9/14/2007 6:51:08 AM