Politics & Economics: China's Use of Rates to Cool Growth Is Limited as Bets on Yuan Increase
BEIJING -- After its second interest-rate increase in four months, China's central bank may be running out of room to use rates as a tool to choke off excess investment, economists say.</br></br>That is because the higher Chinese deposit rates climb, the more attractive it becomes for speculators to take large positions in the yuan in hopes that China's currency will strengthen against the dollar. Such risks have increased now that the U.S. Federal Reserve has taken a pause after two years of increasing rates, making it less attractive to hold dollars.</br></br>The upshot: China's leaders might be forced to rely even more heavily on administrative methods -- such as curbs on the supply of new land for construction -- to slow investment and head off overheating, the economists say.</br></br>"With this rate hike and the pause in U.S. monetary policy tightening . . . there is now less room for further upward moves in Chinese interest rates," Standard & Poor's said after the latest increase was announced late Friday.</br></br>The move by the People's Bank of China, which became effective Saturday, raised benchmark one-year bank-lending rates by 0.27 percentage point to 6.12%. (The U.S. Fed's target for short-term interest rates is 5.25%.) The Chinese central bank also increased rates paid on one-year deposits by the same magnitude, to 2.52%.