How China Is Moving to Slow Economic Growth

(Oct. 19) -- At a time when their American counterparts are scrambling to salvage a fading economic recovery, Chinese officials today raised interest rates in a bid to rein in a runaway real estate market and potentially disruptive inflation.

The People's Bank of China increased its benchmark, one-year lending rate by a quarter of a percentage point to 5.56 percent, an increase that keeps short-term borrowing costs still relatively low but sends a signal to Chinese banks to take it easy on new lending. It was the PBOC's first change in interest rates since it lowered the benchmark rate in December 2008, at the height of the global financial crisis.

At the same time, the central bank ratcheted up benchmark rates for three-year loans by a fifth of a percentage point but increased three-year deposit rates by more than twice that much -- a move that cuts the profits banks will make on new loans.

The PBOC, as usual, offered no explanation for the adjustment.

But it's the latest monetary policy move to highlight the growing divide between the U.S., the European Union, Japan and other industrialized regions that are still struggling to recover from recession and China, India and some other developing countries whose bigger worry now is an overheated economy.

The World Bank this week said China's economy is growing "robustly" and that the Chinese government's efforts to curb growth in 2010 by slowing last year's massive stimulus spending have been offset by a continuing surge in real estate spending and a strong labor market that is bolstering consumer spending there. Though Chinese economic growth may be moderating, it is still "rapid," with gross domestic product expected to increase 9.5 percent this year and 8.5 percent in 2011, the World Bank added.

Moreover, Chinese inflation has picked up, in part because of soaring property prices. And even before the interest rate increase, economists were looking to Beijing for some kind of action.

"In light of the robust growth prospects, it makes sense to further normalize the overall macroeconomic stance to contain the key macroeconomic risks," Louis Kuijs, a senior economist at the World Bank who tracks China, said Monday at a conference in Beijing. "Substantial uncertainty around a favorable outlook calls for policy flexibility rather than continued stimulus by default."

Kuijs praised the government's previous efforts to control lending by lowering government investment but suggested authorities should let interest rates play a larger role too.

For all their differences over trade and a simmering fight over currency policy, U.S. economic officials may be eying the troubles across the Pacific in the world's second-largest economy with envy.

Anemic growth in the American jobs market amid a stalled recovery is the biggest issue in the midterm election campaign and something the Obama administration tries to address on almost a daily basis.

At the same time, the Federal Reserve, in a desperate bid to put the economy back on track, looks likely next month to spend hundreds of billions of dollars on Treasury securities to force lower long-term borrowing costs.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, this week became the latest Fed official to say the Fed's use of a tool first employed in the financial crisis is worth the danger of stoking inflation.

"I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present," he said Monday.

Lockhart spoke hours after European Central Bank President Jean-Claude Trichet said the eurozone still needs the boost coming from the ECB's asset-purchasing program. Earlier this month, the Bank of Japan announced the expansion of its bond buying as a way of adding trillions of yen to the Japanese economy.

But most of Asia is closer to the position of China.

"Asia is leading the global recovery and is moving swiftly back toward normal policy conditions," International Monetary Fund Director Dominique Strauss-Kahn said Monday night in Shanghai before meeting with PBOC Governor Zhou Xiaochuan and other Chinese leaders today.

An IMF regional update released today said the output of East Asian economies has recovered above precrisis levels, and in China and some other countries it is expanding at near precrisis rates.

Foreign investments "are flooding in," Strauss-Kahn said.

All of which is contributing to another problem: a brewing currency war that has seen South Korea, Thailand and Japan struggle to keep their currencies from rising too much against the U.S. dollar.

China, which controls cross-border currency flows and thus has an easier time than its neighbors in keeping its currency's exchange rate stable against the dollar, has once again become an American campaign issue for doing so, since a lower yuan makes American exports more expensive than their Chinese rivals.

Only last week, Treasury Secretary Timothy Geithner chose to delay publication of a politically sensitive report on whether China is manipulating its currency, justifying the decision in part by saying China has allowed the yuan to rise faster against the dollar since the start of September.