China's central bank moved to avert an overheating by raising the base interest rate on lending by 0.27 percentage points from 5.58 percent to 5.85 percent on Friday, clearly signaling to investors to slow down.

 

The rise, the first since October 2004, was intended to "further consolidating the benefits of macro-economic controls and maintaining the momentum for the growth", a statement from the bank said.

 

"Raising the lending rate is the first tightening of the controls," said Ba Shusong, a financial analyst with the Development Research Center, an influential think tank under the State Council.

 

The base interest rate was an effective tool to rein in investment, as banks are still the main channel of finance in China, he said.

 

The hike had been predicted, as rapid growth in fixed assets investment, soaring housing prices and oversupply in key sectors had raised concerns.

 

Figures from the central bank show broad money supply surged by18.8 percent in the first quarter over the same period last year, while new loans totaled 1.26 trillion yuan (US$160 billion), representing half of the central bank quota for the whole year.

 

Fixed assets investment in the first three months soared by 27.7 percent, while the gross domestic product (GDP) rose by 10.2 percent.

 

Fan Jianping, director of the State Information Center, Department of Economic Prediction, said the rate hike would be felt most in the real estate sector.

 

"Raising the lending rate will increase the cost of mortgages and reduce the demand for homes. Increasing the costs for developers will also rein in investment," he said.

 

For existing mortgate borrowers, the central bank move is certainly a bad news, as they will begin to pay more from January 2007. This is the third time since 2003 that mortgage rates are being raised.

 

Property is a major target of the new macro-economic controls. House prices soared in Beijing and other major cities in the first quarter, defying the government's year-long efforts to bring them down.

 

Analysts noted that the central bank had chosen to use interest rates rather than administrative measures such as raising risk reserve requirement for banks to realize its policy.

 

"We take this as a positive development. We have long argued that adjusting the price of money (interest and exchange rates) is much more efficient than using administrative measures," investment bank Goldman Sachs said in a statement.

 

Analysts noted that the rate for savings is not changed. Goldman Sachs said it was reflected the government's intention to encourage consumption as well as their concerns about the impact of higher rates for foreign exchange inflows.

 

Aware of the economy's over-dependence on exports, which has triggered trade disputes and political tensions, China has been keen to stimulate domestic consumption.

 

Analysts agree more controls might follow in the second quarter if the hike fails to achieve its goal.

 

"If overheating continues in the second quarter, there might be another interest rate hike in 2006," said Wang Xiaoguang, an economist with the National Development and Reform Commission.

 

(Xinhua News Agency April 29, 2006)