Beijing applies the brakes by raising key interest rate

Fear of investment bubble spurs first rise since 2004

April 28, 2006|By DON LEE AND MARK MAGNIER | DON LEE AND MARK MAGNIER,LOS ANGELES TIMES

BEIJING -- Seeking to cool its runaway economy, China unexpectedly raised its major lending rate yesterday, sending ripples through global markets that have become increasingly dependent on the Asian nation's growth.

Beijing's move to lift rates for the first time in 18 months pressured commodity prices amid traders' fears that demand from China would soften. The Middle Kingdom's voracious appetite for resources to support its rapid development has been a boon for producers, from copper miners in Chile to cotton farmers in California.

The convulsions in the commodities markets yesterday demonstrated China's influence. The price of crude oil, which has climbed 38 percent in the past 12 months, dropped 1 percent, closing at $70.97 a barrel. Copper futures dropped 3 percent, and zinc tumbled as much as 7 percent. Mining stocks across the globe slid.

Hefty bank lending has contributed to China's huge trade surplus, raising the ire of U.S. politicians and heightening concerns in Beijing that the economy is growing too fast for its own good. China's gross domestic product, the broadest measure of economic output, expanded 10.2 percent in the first quarter from a year earlier, the fastest pace among major economies.

The exceptional growth of China's economy, the fourth-largest in the world, has become a cause for concern.

Analysts and policymakers have fretted that unbridled investment in factories and real estate would lead to asset bubbles that, if burst, could spill beyond China's borders.

Some analysts and business people said yesterday's 0.27 percentage point interest rate increase on the benchmark one-year loan, to 5.85 percent, was too small to affect spending on land, buildings and other fixed assets. They expect no immediate change in the flow of Chinese exports.

Other observers viewed Beijing's move as significant, saying it signaled further interest rate increases and other steps to raise the quality of bank loans and achieve a slower, more sustainable economic growth rate.

"This will have a big psychological impact on the market," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai. He said companies would think twice about borrowing for capital expenditures.

In Washington, Treasury Department spokesman Tony Fratto described China's interest rate increase as positive, because it was making use of market instruments to deal with its economy. China had said it would allow companies and individuals to make investments overseas, a change that analysts regarded as a step toward a market-based currency.

Chinese policymakers left the benchmark interest rate on deposits unchanged at 2.25 percent. Some analysts said that was partly aimed at boosting profitability at China's debt-laden banks.

Don Lee and Mark Magnier write for the Los Angeles Times.

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