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The central bank yesterday raised the interest rate for the third time in less than a year to check surging loan growth.

The rise, announced on Saturday, led to 27-basis-point increase in both one-year deposit and lending rates. The benchmark one-year deposit rate now stands at 2.79 percent and the one-year lending rate at 6.39 percent.

The adjustment followed the release of figures last week that indicated surprisingly high credit growth during the first two months of the year. 

Financial institutions issued loans worth 981.4 billion yuan (US$127 billion) during the two months, equal to 30 percent of all loans extended for the whole of last year, according to the People's Bank of China.

"The rate hike will help curb excessive credit growth and soaring property prices," said Ha Jiming, chief economist of China International Capital Corp.

China has been struggling with rapid investment growth and a sizzling real estate market since 2003. Annual fixed asset investment growth inched down from 26 percent in 2005 to 24 percent last year.

But the fast loan growth in the first two months triggered fears that funds are still being channeled to support new excessive investments.

Ha said the rate rise is justified also for rectifying the negative real interest rate, which has been lingering below zero since the consumer price index (CPI) growth jumped to 2.8 percent in December. The CPI, the key barometer of inflation, stood at 2.7 percent in February; and the one-year deposit rate before the rate hike was 2.52 percent.

Ha said the central bank may need to consider using other tools such as raising reserve requirements for commercial banks or central bank bills if further tightening is needed.

Ba Shusong, a researcher with the Chinese Academy of Social Sciences, agreed. He said the central bank has little room for further interest rate rises because the United States may be entering a rate-reduction period.

The renminbi's interest rate has been lower than the US dollar. Shrinking the difference between interest rates of the yuan and the greenback could prompt an influx of more hot money into China seeking profits from the renminbi.

(China Daily March 19, 2007)