China fights to quell inflation | business | Hindustan Times
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China fights to quell inflation

China is expected to adopt further stringent measures over the coming weeks to calm inflation after the country’s central bank raised interest rates for the second time in just over two months. PHILIP INMAN reports.

business Updated: Dec 27, 2010 21:35 IST

China is expected to adopt further stringent measures over the coming weeks to calm inflation after the country’s central bank raised interest rates for the second time in just over two months.

The People’s Bank of China raised the main lending rate by 25 basis points to 5.81% over the weekend after inflation hit a 28-month high of 5.1% in November.

Analysts said a spending boom that has pushed up property values and triggered a surge in commodity prices had left the Beijing authorities with little choice but to raise rates. The move follows a series of anti-inflationary measures by the Chinese leadership that so far have done little to reduce fears of runaway inflation.

“This demonstrates how determined the government is to control inflation,” said Wang Qing, a Hong Kong-based economist with Morgan Stanley. “Interest rates on medium and long-term loans are adjusted by banks at the beginning of every year so by raising rates now, this will have a much greater tightening effect than it would have in January.”

Wang said he expects three more interest-rate adjustments of 25 basis points each in the first half of next year.

However, officials prefer direct measures to calm demand, fearing high interest rates will attract “hot money”. China has already cracked down on speculation in commodities on its three main exchanges, in Shanghai, Dalian and Zhengzhou, while miners and flour producers have been told to freeze prices and increase production.

Banks were also told earlier this year to increase the proportion of deposits they must hold in reserve with the central bank to restrict lending.