China Central Bank Raises Interest Rate on Mortgages

Byzjx

Updated Thu, 17 Mar 2005 00:00:00 GMT

 China's central bank said that it was raising the interest rate on mortgages, after more signs emerged that the country's economy might be growing at an unsustainable pace as property prices soar.

The minimum 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 equal to 30 percent of the purchase price, instead of 20 percent, in cities that have experienced especially rapid appreciation lately.

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 expressed worries in the last week that real estate speculation was becoming out of control and making housing less affordable.  

The central bank tempered the effects of the 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 one-hundredths of a percent from 1.62 percent, is to encourage banks to lend more money, though the banks are still under administrative controls governing the volume of loans to sectors that may be overheated.

"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, prices could rise even higher for crude oil and other commodities that China now imports in enormous quantities. Copper prices jumped on Wednesday in London to a record $3,307 a ton as Chinese companies placed large orders, while oil prices hit a record, touching a high of $56.60 a barrel, despite a pledge by the Organization of the Petroleum Exporting Countries to increase production 2 percent. Oil later settled at $56.46 a barrel.

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, 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 evened out a bit among various sectors of the economy.

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

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