China Raises Rates to Counter Inflation

The one-year lending rate will increase to 6.56 percent from 6.31 percent tomorrow, the People’s Bank of China said on its website. The one-year deposit rate rises to 3.5 percent from 3.25 percent.

Stocks fell and oil and copper extended losses on concern that a slowdown in China will add to headwinds for the global economy. JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Merrill Lynch said the increase may be the last this year as analysts forecast that inflation will moderate after probably exceeding 6 percent last month.

The government’s appetite for tightening may “wane in response to evidence that the economy is slowing,” said Mark Williams, a London-based economist with Capital Economics Ltd. Inflation “is now widely expected to decline in the second half of the year,” he said.

Oil lost 0.6 percent to $96.28 a barrel in New York. Copper for three-month delivery fell 0.5 percent to $9,494 a metric ton on the London Metal Exchange. The Stoxx Europe 600 Index declined and Standard & Poor’s 500 Index futures also slid.

Wen’s ‘Difficulties’

A government report next week will show that China’s inflation accelerated to 6.2 percent in June, according to the median forecast in a Bloomberg News survey of economists. Consumer prices rose 5.5 percent in May, the most since July 2008, mainly driven by food costs.

Premier Wen Jiabao said last month that the government may fail to meet a full-year inflation target of 4 percent after the rate was 5.2 percent for the first five months.

“I see difficulties in reaching the full-year inflation target,” Wen said in comments in London, broadcast on June 27 by Hong Kong-based Cable TV. “But it still can be kept below 5 percent after the efforts we have made.”

China’s government is reining in credit after record lending in 2009 fueled the nation’s economic rebound and increased the risk of real-estate bubbles and bad loans. The nation’s first audit of local-government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of 2010 and warned of repayment risks.

The nation’s economy is in a “bit of a bubble” after officials waited too long to stem inflation, billionaire investor George Soros, 80, said June 14 at a conference in Oslo.

Property Market

Wen wrote in the Financial Times on June 24 that efforts to stem inflation have worked and the pace of consumer-price increases will slow. “The overall price level is within a controllable range and is expected to drop steadily,” the premier said.

Besides raising rates, officials have boosted banks’ reserve requirements to record levels, restricted mortgages and home purchases, and allowed gains by the yuan against the dollar. A stronger currency can limit inflation by cutting import costs.

Standard & Poor’s has cut the outlook for the nation’s property developers to “negative” on the likelihood of slower sales and lower prices. Hazards for the economy also include power shortages, a credit squeeze for small and medium-sized companies, and signs export demand is weakening.

Still, analysts including Wang Tao, of UBS AG, say the nation is unlikely to suffer a “hard landing.” May data showed the economy maintaining momentum, with industrial production rising 13 percent and an acceleration in fixed-asset investment. A government plan to build millions of low-cost homes may also sustain growth.

Yum! Brands Inc., owner of the KFC fast-food chain, said June 1 that rising wage costs in China will be offset by more people being able to afford the company’s meals. The World Bank forecasts the economy will expand 9.3 percent this year, compared with 8 percent for India, 2.6 percent for the U.S. and 1.7 percent for the euro area.


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