BIZCHINA / Biz Who |
Even small interest rate rise can cool housingBy Yi Xianrong (China Daily)Updated: 2007-03-21 09:01 The author is a researcher with the Institute of Finance and Banking at
the Chinese Academy of Social Sciences On March 17, the People's Bank of China, the central bank, announced a 0.27 percentage point hike in key interest rates. This was dictated by current major economic indicators. Macroeconomic readjustment policies in 2006 seem to have not worked effectively to put a brake on runaway real estate prices.
In addition, the banks are feeding growing real-estate investments with their readiness to make loans. Starting from the latter half of 2006, the central bank, confronted with overheating investment, rapid growth in bank loans and increasing trade imbalances, implemented a host of macroeconomic readjustment policies. To slow growth in bank loans, the central bank raised the deposit reserve ratio and required market operations to be more transparent. However, these policies had limited effect.
In the monetary market, the price of capital is nothing more than the interest rate. The price mechanism works in the form of interest rates' ups and downs. In China, whose economic set-up is still in transition from the planned economy to a market oriented one, the price mechanism is still at the core of the general economic operation. Currently, many problems in the Chinese economy have their roots in the low-interest-rate policy. It leads to overheating in fixed asset investment and excessive growth in the country's favorable trade balance. In the context of low interest rates, it is profitable for investors to
borrow money from the bank. The investors, who borrow low-cost money, feel no
restraint in investing in high-risk projects. The capital easily flows into
economic operations, particularly real estate and the stock market. Under such
circumstances, it is only natural that stock and real estate prices keep
soaring.
(For more biz stories, please visit Industry Updates) |
|