China Raises Home-Loan Rate in Bid to Slow Soaring Growth

March 16, 2005

China Raises Home-Loan Rate in Bid to Slow Soaring GrowthBy KEIT

ONG KONG, March 16 - China's central bank announced late today that it was raising the cost of housing loans, after more signs emerged that the country's economy may be growing at an unsustainable pace as property prices soar.

The minimum regulated interest rate for housing loans of five years or more will rise to 5.51 percent, from 5.31 percent. Banks will also be encouraged to require down payments of 30 percent of the purchase price, instead of 20 percent, in cities that have seen especially rapid appreciation lately, the People's Bank of China said.

The moves come a week after Shanghai began assessing a capital gains tax of 5.6 percent on real estate bought and sold in less than a year, and after delegates to the National People's Congress in Beijing voiced worries in the past week that real estate speculation was becoming out of control and hurting the affordability of housing.

Real estate prices have been climbing faster in China than in much of the United States, with urban prices escalating 10.8 percent in the fourth quarter after a jump of 8.6 percent in the third quarter. Prices have been rising even faster in Shanghai, where overseas investors have been buying up apartments in hopes of profiting from not only from rising prices but also a possible increase in the value of China's currency against the dollar.

The Chinese central bank tempered the effects of the housing loan rate increase on the overall economy, however, by reducing the interest rate it pays banks for reserves they hold in excess of regulatory minimums. The effect of the decrease, to 99-hundredths of a percent from 1.62 percent, is to encourage banks to lend more money, although the banks are still under administrative controls governing the total volume of their loans.

Unexpectedly strong increases this year in exports, industrial production and consumer price inflation, together with a jump in fixed-asset investment announced today, are prompting many economists to begin questioning whether Chinese leaders can follow through on pledges to slow the growth rate of the economy to 8 percent this year, from 9.5 percent last year.

"We have an economy that is stronger than we thought; the slew of January and February numbers is pretty impressive," said Jonathan Anderson, a UBS economist here.

If growth continues to accelerate in China this year, creating greater demand for raw materials, it could push even higher the prices of crude oil and other commodities that China already imports in enormous quantities. Copper prices jumped 2 percent today in London to a record $3,307 a ton as Chinese companies placed large orders, while oil prices were down slightly after member countries of the Organization of Petroleum Exporting Countries agreed to increase production by 2 percent.

The big question now is whether the Chinese economy's vigor, combined with a huge inflow of both speculative and long-term investment, will feed inflation within China, which could be socially and even politically disruptive. While consumer prices were 3.9 percent higher last month than a year earlier, some economists are less worried now about inflation than they were in the spring of last year, as the pace of growth has become more even among many sectors of the economy.

Construction of new steel mills, which boomed in early 2004, has slowed. Some of the fastest growth this year has been in exports, while investment spending has soared fastest this year in areas that proved bottlenecks to growth last year, notably coal mining, electricity generation, oil refining and transportation.

Liang Hong, a Goldman Sachs analyst, said that she had no plans to increase her forecast that consumer prices in China would rise just 2.6 percent this year, even though she expects growth to exceed the government's target of 8 percent.

"It seems to be close to 9 rather than close to 8," she said.

Qu Hongbin, an HSBC economist, said Chinese regulators had been effective in persuading banks to slow the annual growth rate in loans, to less than 15 percent now from 24 percent at the end of 2003. This will start slowing investment spending and the rest of the economy soon, he predicted.

But Andy Xie, a Morgan Stanley economist, was more pessimistic, contending in a research note that China faced an overheating economy and a property bubble.

Vigorous economic growth and rising exports combined with currency speculation are increasing the pressure on China to allow greater flexibility in its currency, which is known as the yuan or renminbi and has been effectively pegged at 8.28 to the dollar for almost a decade. Prime Minister Wen Jiabao surprised financial markets on Monday by mentioning that if China acted on the currency, it would do so unexpectedly, although he also cautioned that there would be risks to the global economy from any revaluation.

China's foreign currency reserves jumped nearly $100 billion in the fourth quarter alone as the central bank exchanged yuan for the flood of dollars pouring into the country mostly through unofficial channels. Raghuram Rajan, the research director of the International Monetary Fund, urged China in a speech here on Tuesday to let the yuan trade in a wider range, a step that would likely result in its appreciation in the short term, saying that steps like interest rate controls, bond sales and capital controls could not indefinitely prevent the inflow of money from feeding inflation.

"The inflation genie can indeed be bottled up," he said. "Eventually, however, it will get out as all these controls lose their effectiveness. Long-term undervaluation is simply too difficult to manage."

Investment in factories, office buildings and other fixed assets in urban areas climbed 24.5 percent in the first two months of this year compared with a year earlier, an acceleration from a year-over-year increase of 21.3 percent in December, China's National Bureau of Statistics said today. Data for the first two months of the year are often combined in China because of difficulties in adjusting for the shifting dates for the beginning of Chinese New Year celebrations, which depend on a lunar calendar.

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