The People's Bank of China raised its benchmark interest rates on August 19, with one-year deposits and loan rates jumping 0.27 percentage points. 

The move aims to rein in soaring credit and cool overheated key industries. The one-year deposit rate now stands at 2.52 percent while the benchmark loan rate is 6.12 percent. But what is the impact of this on people's daily lives?

Deposits

 

The past week has seen customers, mostly middle-aged or elderly, swarming bank counters to renew their fixed deposits to benefit from the higher rates which were the first hike since October 29, 2005.

 

The rise translated into an interest gain of 21.60 yuan (US$2.70) on a one-year 10,000-yuan deposit.

 

However, financial planners advised residents to check the remaining time left on their deposits before deciding to renew as not every renewal will benefit the deposit holders.

 

So, don't bother rushing to bank counters if your one-year deposits have already been sitting in the bank for 54 days, or for 163 days on the three-year ones or 284 days on the five-year type.

 

Mortgages

 

Xiao Yao, a 26-year-old white collar worker, immediately logged on the central bank's Website on late August 18 once she heard about the rate hike.

 

She scrutinized the announcement of the rise as she sought to calculate how much more she has to pay on her five-year mortgage on a new apartment in the city.

 

She was relieved when she learnt that the central bank also allows commercial banks to offer a 15 percent discount on individual mortgage loans from the previous 10 percent discount. Moreover, rates on loans from public housing funds remain unchanged.

 

Banks in Shanghai, including Industrial and Commercial Bank of China and Bank of Communications, said new mortgage applicants with good credit histories will enjoy a 15 percent rate cut while those who have already signed mortgage deals with banks before the rate hike will also enjoy the same discount on the new rates from January 1.

 

For Xiao, the new preferential rate (6.48*0.85 = 5.508) is the same as her previous preferential one (6.12*0.9 = 5.508), meaning she makes the same monthly payment.

 

On longer-term mortgages, the extra monthly payment is limited. For instance, the higher interest on 10,000 yuan on a 20-year mortgage means one has to pay 0.35 yuan more per month. On a 20-year mortgage of 500,000 yuan, one has to pay an extra 17.50 yuan a month.

 

But banks will not give a discount on the rate for borrowers with bad credit or to speculative buyers.

 

Stocks

 

The Shanghai Composite Index ended at 1,623.03 on Friday, up 1.6 percent from a week ago. Meanwhile, the Shenzhen Composite Index, which tracks the smaller mainland bourse, gained 2.04 percent in the same period.

 

"The market has already digested the impact of the rate hike as market talk had been about the interest rate hikes for months," said Sun Wei, a fund manager at Guotai Jun'an Allianz Fund Management Co.

 

Analysts noted that some stocks, like banking and property, might edge downward in the short term after the rate jump.

 

However the rate rise could back a long-term advance in the market by preventing a sudden fall in the economy after austerity measures were introduced by the central government to rein in some overheated industries.

 

Consumption

 

Theoretically, a deposit rate hike will prompt people to place more money in banks and cut consumption. However, analysts noted that the rate rise was capped to ensure the impact on people's daily lives would not be too huge.

 

For instance, a higher interest on a 100,000- yuan one-year deposit means an extra 21.70 yuan, but the average monthly gain is only a mere 1.8 yuan, which barely puts a dent in consumption.

 

"Cut consumption because of a mere 27 basis point rate hike? Of course not," said Xiao Gu, a 25-year-old lawyer who earns a pre-tax monthly salary of 14,000 yuan. "Life goes on, the rate hike is too small to cast a (negative) effect for me."

 

Auto loans

 

Most auto finance companies, including Shanghai-based GM-SAIC Automotive Finance Co, haven't decided whether to raise their car loan rates. They have the discretion to offer a rate discount of up to 10 percent or raise rates 30 percent over the central bank's benchmark rates, depending on a buyer's credit history.

 

(Shanghai Daily August 28, 2006)