The , the country's central bank, announced on October 29 that
it would raise both lending and deposit interest rates by 0.27
percentage points. The one-year deposit interest rate will increase
to 2.25 percent, while the one-year lending interest rate will rise
to 5.58 percent.
This long awaited adjustment has met with different responses
from groups both at home and abroad, but how will ordinary Chinese
people react to it?
The increase aims to curb, to some extent, the overheated
economy and to reduce inflation. Of course, it will also enhance
purchasing power. So a "wealth effect" can follow, i.e. people feel
wealthier, so feel able to buy more.
Due to previous low deposit interest rates, people have had
little reason to save. RMB deposits increased 2.7 trillion yuan in
the first nine months of this year, 499 billion down on the
equivalent period of 2003. Domestic savings, which had shown
negative growth for eight consecutive months, increased 1.2
trillion yuan during the same time, a decrease of 207 billion on
the previous year.
Since the adjustment was announced last Friday, banks say they
have been busy with people depositing money or withdrawing their
savings to re-deposit them as one-year or longer fixed deposits to
take advantage of the change.
"The interest rate adjustment can help increase residents'
interest income, especially in the medium and long term, because
the adjustment for medium and long-term interest rates will be
larger than that for short-term rates," said a spokesman for the
central bank.
On October 29, shares in Shanghai Stock Exchange and Shenzhen
Stock Exchange dropped sharply.
Theoretically, an increase in interest rates can discourage
investment in stocks, according to Wang Yongjun, head of the
Finance and Economics Institute of the Central University of
Finance and Economics.
However, Wang added, since the stock market is influenced by
many factors, small short-term interest rate hikes shouldn't exert
too much influence and any effects should be easy to recover
from.
Treasury bonds have met with great popularity since the increase
was announced. Bonds in many banks such as the Industrial and
Commercial Bank, Construction Bank and Beijing City Commercial Bank
were soon sold out after their second issue this year on
Monday.
According to Ministry of Finance rules, bond interest rates are
pegged to those of savings, meaning the rate for three and
five-year bonds were raised to 3.37 and 3.81 percent
respectively.
Insurance could also be affected by the adjustment. According to
rules of the China Insurance Regulatory Commission, the compound
interest from insurance products cannot exceed 25 percent each
year. After the increase, interest income has nearly equaled that
of insurance products. However, since saving is safer, there are
likely to be fewer policyholders and some policy cancellations.
Long time low interest rates have also caused money to flow into
the real estate sector, but after the hike the interest rate for
accumulation fund loans of five years and over will increase to
4.23 percent, while the rate for private housing loans of five
years and over will rise to 5.31 percent.
According to an official from the Agricultural Bank of China in
Guangdong Province, more people are paying off their housing loans
in advance, since less investment options make this the wisest use
of their money.
(China.org.cn by Yuan Fang November 9, 2004)