* China raises interest rates by 25 basis points
* Third rate rise this year
* Intention may be to pre-empt rise in inflation data
* Analysts reckon inflation fight is nearing end
By Kevin Yao and Aileen Wang
BEIJING, July 6 China raised interest rates for
the third time this year on Wednesday, making clear that taming
inflation remains a top priority even as the growth pace of its
vast economy gently eases.
The 25-basis-point increase in lending and deposit rates
underscored China's quiet confidence that the world's
second-biggest economy is resilient enough to endure tighter
monetary policy and is not threatened by the hard landing that
some investors fear.
Analysts suggested China was close to, or even at the end,
of a cycle of rate rises and the latest move was a pre-emptive
strike before another big jump in inflation in data next week
heightens depositors' worries about low yields.
"Today's rate hike suggests that China's June inflation
could be higher than expected and the second-quarter GDP remains
solid, consistent with our expectation," said Ligang Liu, head
of Greater China economics at ANZ in Hong Kong.
"The rate hike will help the PBOC to fine-tune its monetary
policy by alleviating the worsening negative real interest rate
problem so as to prevent an outflow of deposits from the banking
The latest move increases China's benchmark one-year lending
rate to 6.56 percent, and its benchmark one-year deposit rate to
3.5 percent, the central bank said.
The increases will take effect from Thursday, the central
bank said in a short statement on its website.
Risky assets, particularly those with direct links to
China's growth such as the Aussie dollar , sold off
after the announcement, reacting to concerns this latest
monetary tightening will choke an already sluggish global
China-watchers couldn't agree on whether there will be more
rate rises in the second half of the year. The People's Bank of
China (PBOC) has raised banks' reserve requirements nine times
in addition to these rate rises in its nine-month cycle of
tightening monetary conditions.
"China's inflation battle is almost at an end. Already,
there are signs that price pressures are coming off," said
Frederic Neumann, an economist at HSBC in Hong Kong. "Today's
rate hike may therefore have been the last in the cycle,"
GROWTH VERSUS INFLATION
Hopes that the PBOC may be near a pause in tightening was
seen as a positive for stocks and could halt the rise in yuan
onshore swap rates. Such expectations have helped the Shanghai
Composite index bounce from nine-month lows hit in June.
The world's second-biggest economy expanded more than 10
percent last year but has cooled in 2011. First-quarter growth
was 9.7 percent and data next week is expected to show the pace
eased to 9.4 percent in the second quarter.
Evidence is growing that China's vast manufacturing sector
is losing momentum, due both to tighter policy at home and
slowing demand overseas.
A survey of purchasing managers showed the factory sector
expanded at its weakest pace in 28 months in June, mainly owing
to a drop in new orders. Many analysts reckon the pace is in
keeping with an economy expanding on average at around 9 percent
and industrial growth of around 13 percent.
Moreover, a double-digit increase in wages is expected to
feed into already strong domestic demand.
With U.S. interest rates near zero, Beijing worries it might
attract more speculative funds into China if it raises rates too
far. That would exacerbate the problem of excess liquidity and
further fuel inflation.
Equally, it has to placate depositors struggling with a
negative real rate of return on their cash in banks.
China's inflation quickened to a 34-month high of 5.5
percent in May as elevated food prices and a red-hot property
market kept price pressures alive.
A Reuters poll forecast data due on July 15 will show that
inflation in June rose to 6.3 percent -- its highest reading
since mid-2008. Many economists estimate inflation will peak in
June or July.
Beijing is especially sensitive to rising prices that might
stir social unrest and threaten its leadership.
Wang Jun, an economist at CCIEE, a government think tank,
said Beijing may feel compelled to raise rates again if
inflation, proves more stubborn than expected.
"If inflation comes down, there will be no need to raise
rates. But if prices rebound, there could be further rate
rises," he said.
(Writing by Koh Gui Qing and Vidya Ranganathan; Editing by Ruth
Pitchford and Neil Fullick)