China increases interest rates to check inflation, growth

China raised interest rates in the latest series of tightening steps aimed at keeping inflation in check and preventing the world’s fourth-largest economy from overheating. The People’s Bank of China increases its benchmark one-year lending rate by 0.27 percentage point to an eight-year high of 6.84 percent. The deposit rate will increase by the same amount to 3.33 percent and a tax on interest income will be cut on August 15 to encourage saving. The central bank cleared that the move aims at keeping money supply and credit expansion, as well as investment, in check. China has raised its benchmark interest rate third time since March and five times since April 27, 2006. It has also raised banks’ reserve requirements eight times since June 2006. China is trying to slow lending and investment fueled by record exports after it announced on Thursday that its economy grew at a rate of 11.9 percent in the second quarter. In June, consumer prices rose to all time high in the last 33 months by 4.4 percent, and factory and property spending has surged while the main stock index has almost doubled in value this year. The rise in consumer prices, lifted by a 7.6 percent jump in food costs, was well above the official target of 3 percent. Although economy is growing on a healthy pace, yet it’s receiving criticism from the major trade partners viz. US and EU. America impeached China for undervaluing its currency. Chinese manufactured goods were under regulators’ scrutiny for containing toxic ingredients. Apart from the allegations, Chinese economy is also under pressure from swollen trade surplus and high energy consumption. China’s communist leaders want fast growth to reduce poverty but are trying to cool some industries. They worry that runaway investment could push up inflation or ignite a debt crisis if borrowers default. Besides the interest rate hikes, they have also imposed investment curbs on some industries. Chinese authorities are worried about the rising food prices, which hit the populous countryside quite hard. Source

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