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China Hikes Interest Rates

The People's Bank of China boosted the one-year lending and deposit rates.

In the latest in a series of moves to cool inflation in China's surging economy, Beijing raised interest rates at the end of trading Thursday for this sixth time this year.

The People's Bank of China increased the one-year lending rate by 18 basis points, to a nine-year high of 7.29%, and also increased the one-year deposit rate of 27 basis points, to 4.14%. The increases will take effect on Friday.

The increases came as no surprise to market participants in Asia, most of who were expecting the news over the previous weekend, since Beijing usually announces policy decisions on Saturday or Sunday.

"This is not too much of a surprise. Before the end of the year there have been a variety of policy measures introduced that have been aimed at cooling areas of the economy," says Sean Darby, head of Asian strategy for Nomura Bank in Hong Kong.

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While a higher interest rate may weigh on share valuations, it is also true that in contrast to most economies, an interest rate hike is not always a negative for domestic shares. When the People's Bank last raised interest rates, Sept. 14, the Shanghai Composite Index rose 2.7% the following week, and the

iShares:FTSE/Xinhua 25

(FXI) - Get Report

soared 7.7% as traders viewed the move as a bullish measure of the country's growth.

The policy follows a higher-than-expected increase of half a percentage point in the

reserve ratio requirement for banks in China, to 14.5%, on Dec. 9.

"China always wanted to keep policy loose to keep employment growth high, and could even live with a bubble. Now though, inflation is peaking beyond its comfort level," adds Darby.

Prices in consumer goods climbed 6.9% on the year in November, its fastest rate of growth since December 1996, while food prices surged 18.2% vs. 17.6% in October.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.