China raised interest rates for the fifth time in 15 months on July 20. It also announced that the tax on bank deposit interest income would be cut to 5% from 20% on August 15. The moves came just one day after Beijing reported second quarter economic growth of 11.9%, up from the 11.1% GDP growth seen in the first quarter. It was the fastest single quarter rise in 12 years.
The inflation rate was also a worry, hitting 4.4% in June, up nearly two percentage points year-on-year. It beat the central bank’s 3% target for the fourth month in a row.
In fact, the writing was on the wall long before the growth figures were announced. Over the preceding days, China was rife with talk of how to rein in the economy. In addition to the interest rate hike and tax cut, an increase in bank reserve ratio requirements was expected.
Urban fixed-asset investment jumped 26.7% in the first half of the year after an increase of 25.3% was posted in the first quarter.
Economists said the investment was fueled by China’s rising trade surplus, which came to US$112.5 billion in the first half, up 84% on a year earlier. In turn, the surging surplus sent China’s foreign exchange reserves pass US$1.33 trillion at the end of June, up 41.6% year-on-year.
Viewed in the context of this data, the observation made earlier in the month by Ma Kai, National Development and Reform Commission chairman, that the economy is still in danger of overheating, seemed somewhat mundane.
The NBS announcement that it was revising its growth assessment from 2006 to 11.1% from 10.7% had an air of predictability. The alterations mean China’s 2006 GDP was US$2.65 trillion. It looks set to soon pass Germany and become the world’s third-largest economy.
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