Faced with climbing inflation, Chinese regulators took a number of steps in March to curb runaway growth and control liquidity.
As the Chinese government came together for the annual session of the National People’s Congress (NPC), it was confirmed that consumer prices jumped 2.7% in February, compared to 2.2% in January. The increase was due to a significant hike in food prices, which rose by 6%.
Speaking at the NPC, Premier Wen Jiabao announced the government had set a growth target for 2007 of 8% but most economists expect the final figure to be closer to the 10.7% posted last year. The 2006 target was also 8%.
In addition to rising inflation, factory output for January and February grew 18.5% from a year earlier, bank lending and money growth were up in February and the monthly trade surplus hit US$23.76 billion.
The People’s Bank of China (PBOC) responded by raising interest rates 0.27% on March 17 to bring the one-year benchmark deposit rate to 2.79% and the one-year lending rate to 6.39%. It was the third hike in under a year.
"The rate increase is conducive to the reasonable growth of credit and investment… and to promoting the healthy but rapid development of the economy," the PBOC said in a statement.
The interest rate hike followed a 0.5% increase in banks’ reserve ratio requirement which, combined with four other hikes since July 2006, brings total reserve requirements to 10%. The latest hike could take US$23.22 billion out of the banking pool and cut down on excess liquidity caused by "unbalanced international payments generated by mounting trade surplus".
Analysts expect the tightening measures – both reserve requirement and interest rate hikes – to continue this year. Reserve requirements could end up as high as 11.5%.