Chinese language - Central bank raises interest rates, cuts interest income tax

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BIZCHINA / Center

Central bank raises interest rates, cuts interest income tax

By Xin Zhiming (China Daily)
Updated: 2007-07-21 09:42

China decided to raise interest rates and cut the withholding tax on
interest income on Friday in a coordinated move to get the blistering
economy onto a healthier footing.

The benchmark one-year deposit and lending rates of commercial banks will
be raised by 0.27 percentage point, effective from Saturday, the central
bank said in a statement on its website.

Meanwhile, the State Council, reduced the withholding tax on interest
income to 5 percent from 20 percent as of August 15.

The National People's Congress authorized the government to change or
abolish the tax last month.

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China raises benchmark interest rates by 0.27%, 03/2007

The interest rate hike was the third this year. It will take the one-year
benchmark deposit rate to 3.33 percent from 3.06 percent. The one-year
lending rate will rise to 6.84 percent from 6.57 percent.

The interest rate on demand deposit was also raised from 0.72 percent to
0.81 percent, which was not been seen since 2002.

The combined move was not unexpected after the country released its
macroeconomic statistics for the first half of this year, said Dong
Yuping, an economist from the Institute of Finance and Banking at the
Chinese Academy of Social Sciences (CASS).

The National Bureau of Statistics (NBS) said on Thursday that the
nation's gross domestic product grew by a sizzling 11.5 percent in the
first six months and its consumer price index (CPI) rose by 4.4 percent
in June, the highest in more than two years, and 3.2 for the January-June
period. China's fixed-asset investment increased 25.9 percent during the
same period.

The high CPI figures are especially worrisome as the prices of
foodstuffs, such as pork, egg and grain, have soared in recent months,
analysts said.

Food prices, which account for about one-third of the CPI basket, rose
11.3 percent in June, when pork prices rose 59.8 percent and egg prices
went up 37.9 percent, according to the NBS.

The NPC's Financial and Economic Affairs Committee warned before the
release of the figures that the economy has shown more signs of
overheating, seen as a strong signal that tightening measures are in the
pipeline.

Since the real interest rate has long fallen into negative territory, the
adjustment in deposit interest income tax is just normal, Dong told China
Daily.

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