Fears grow for China after first rate rise in nine years
By Edmund Conway (29/10/2004)

China yesterday raised its benchmark interest rates for the first time in nine years, betraying its increasing concern about the future of its overheating economy.

Oil and metal prices fell and mining stocks slumped on the London Stock Exchange after the central bank announced the 0.27pc point rise, which leaves the country's one-year lending rate at 5.58pc.

Brent crude dropped $1.08 to $48.37 a barrel, while Xstrata, Antofagasta, BHP Billiton, Anglo American and Rio Tinto led the fallers in the FTSE 100. Record levels of Chinese demand have inflated commodity prices to high levels and traders fear that a Chinese crash would end the sector's boom.

Economists said the decision had come as a surprise because recent estimates of the country's economic expansion indicated that it was already slowing slightly.

Qu Hongbin, HSBC's China economist, said the Chinese government was trying to moderate the spending of the powerful and independent-minded local governments; the mayor of Changzhou was sacked recently for authorising a big steel project.

"Investment growth has rebounded to an average 8pc over the past three months as the effect of administrative controls tapered off," he said. "Meanwhile, although credit growth has slowed rapidly in the past three months, monetary tightening will not immediately rein in investment activity." He said he expected rates to rise by a further quarter point early next year.

Diana Choyleva of Lombard Street Research said that even if business investment tailed off, Chinese consumers would be left supporting the economy.

"Consumer demand is unlikely to be strong enough to outweigh the drag from exports and investment," she said. "Even if real incomes grow, the Chinese are likely to decide to save more rather than spend more. There is no scope for credit-driven consumer spending due to the weakness of the banking system. China is heading for a brick wall."

Julian Jessop of Capital Economics dismissed speculation that yesterday's move was a prelude to China's plans to revalue its currency, the undervalued renminbi.