CHINA, which raised benchmark bank lending rates for the first time in 18 months on Thursday, has prompted sky-high world oil and commodity prices and some major stock markets to make a U-turn.
The Peoples Bank of China raised one-year lending rates to 5.85% from 5.58%.
The rate rise, effective from yesterday, is seen as an attempt to slow rapid lending growth and the skyrocketing investment.
The move taken by the Peoples Bank of China, the central bank, is also seen as an attempt by Beijing to prevent the fastest growing economy in the world from overheating.
It grew by a spectacular 10.2% in the first three months this year, Chinas official statistics said.
The National Bureau of Statistics reported last week that Chinas fixed-asset investment, a closely watched economic indicator, jumped by 27.7% in the first quarter, up from the previous years 25.7%. Much of the bank lending is pouring into new factories, buildings and other fixed asset projects.
Meanwhile, Chinas banks released 1.26 trillion yuan (RM570bil) in new loans in the first quarter more than half the central banks target for the whole year.
The world financial and raw material market jitters came amid concerns the move may cool Chinas annual 10%-plus economic boom a growth driving the fastest world expansion in the past three decades and seemingly endless growth in Chinas demand for raw materials and investment.
Oil prices, which surged in recent months in part on growing demand from China, fell and shares of mining companies tumbled as traders bet that the growing demand for copper, steel and other commodities fuelled by Chinas rapid expansion could slow.
The move is significant in the sense that it signals the authorities in China are now acting to reduce rates of economic growth, despite its low level of inflation, Paul Niven, Head of Asset Allocation at F&C Asset Management in London, said.
The Peoples Bank of China said the move was meant to keep the economy on an even keel.
The increase in the lending rate is aimed at further strengthening the fruits of macro controls and keeping solid momentum for the economy to grow in a continuous, rapid, coordinated and healthy manner, it said in a statement.
While increasing the lending rates, the bank, for the time being, kept its benchmark one-year deposit rate unchanged at 2.25%, which some analysts say shows Central Bankers do not want to put too much cool water on its economy by dampening domestic consumption, and, its seemingly reviving Shanghai and Shenzhen stock bourses.
Chinas stock market has been bearish for the past five years.
Its a very timely move as the first-quarter economic figures point to signs of an overheating economy in the making, said Li Yongsen, an economist with Renmin University of China.
Compared with requiring banks to lock up more deposit reserves, a rate increase is more effective in reining in lending growth, Li said.
While the central bank rate increase is intended to discourage lending in general, the government has also taken more targeted measures in sectors where growth appears to be outstripping demand.
Investment controls have already been imposed on the aluminium, ferrous alloy and cement industries.
The auto industry will be next, He Yanli, a vice-director at the National Development and Reform Commission, told Dow Jones Newswires on Thursday.
Car sales in the first three months this year rose 74% from the same period a year earlier to 890,000 units, according to data from the China Association of Automobile Manufacturers.
The US Treasury Department welcomed the move as a sign Beijing was being flexible in its management of the giant economy.
Its another example of the Chinese using market instruments to deal with market conditions in their economy, said treasury spokesman Tony Fratto. From that perspective, its positive.
Federal Reserve Chairman Ben Bernanke said that allowing the yuan to move more freely would give Beijing even more independence in setting monetary policy.
Its a very large country, they need to have an independent monetary policy. They cant really run independent monetary policy without a flexible exchange rate, he said.
Lorenzo Bini Smaghi, the European Central Bank board member responsible for international relations, called the Chinese move a step in the right direction.
Asked in Florence, Italy, if more increases were needed, he replied: Yes and theyll do it.
Its a positive step in so far as it should help take some of the steam out of investment demand.
It also signals a proactive central bank, said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.
The Chinese authorities have been trying for the past year to rebalance high economic growth rates away from investment and more into domestic consumption a shift that could help rein in the soaring trade surplus by lifting imports, analysts said. China Daily/ Asia News Network