Bank interest rate is raised to 3 per cent, third time in a row. Beijing hopes to contain inflation this way, but many fear the January rate will exceed 5 per cent. Experts suggest that a higher cost of borrowing will not be enough, that more drastic measures are needed.

Beijing (AsiaNews/Agenzie) – The yuan is near record highs in 17 years, after China’s central bank, the People's Bank of China (PBOC), raised interest rates for the third time in four months to curb inflation. More and more experts believe however that inceasing the cost of borrowing will not be enough and that the chinese currency must be revalued.

The yuan traded at 6.5824 per dollar in Shanghai, just short of the record 6.5808 reached on 21 January, the strongest level since China unified official and market exchange rates at the end of 1993. The one-year interest-rate swap jumped to 3.84 per cent, far below what it ought to be.

Washington and Western nations have pushed for change to have the exchange rate reflect real value, but Beijing has resisted fearing that it would push up the cost of its products and negatively affect jobs and exports. However, in doing so imports have a higher cost.

Instead, the PBOC has opted for cutting liquidity and raise the cost of money to 3 per cent (on one-year deposits), which still leaves China’s benchmark below Brazil’s 11.25 per cent, India’s 6.5 per cent and Russia’s 7.75 per cent, but above the near-zero interest rates in the U.S. and Europe.

Yet, up to 1.2 trillion yuan of new loans were made in the first two weeks of January, compared with 1.39 trillion yuan a year earlier.

Low interests will also attract foreign investments, which is good news for industrial production, but bad news on the inflation front.

Today Beijing also raised the rate for loans with a five-year maturity or more from 4.3 per cent to 4.5 per cent for first time home buyers.

This leaves the interest rate below the inflation rate, which hit 5.1 per cent in November and 4.6 per cent in December. Experts believe that in January it will be above 5 per cent because of heavy snowfalls, which wiped out crops, and Lunar New Year celebrations.

With the base rate below the nation’s inflation rate, consumers have an incentive to spend their money rather than keep it in the bank where it can only lose value.

Thus, today’s action appears inadequate to contain inflation. Further and more drastic steps are called for, like a greater appreciation of the yuan.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, said Beijing might have to raise rates again, possibly as early as late March, if the consumer price index exceeds 5 per cent this month.

• china
• inflation
• banks
• interest
• rates
• yuan
• value
• appreciation