China's Monetary Moves Signal Gradual Reform

By Agence France-Presse China's decision to raise interest rates and scrap limits on bank lending rates signals a willingness by Beijing to move toward greater economic liberalization and, eventually, a more flexible exchange rate, analysts say. China's central bank said Oct. 28 it would raise its benchmark one-year lending rate to 5.58% from 5.31% -- the first such move in nearly a decade, thus making the decision a turning point in China's monetary history, according to analysts. The one-year deposit rate was hiked, also by 27 basis points, to 2.25%, according to the central bank statement. The ceiling on borrowing rates that commercial banks can charge was also scrapped. Standard Chartered economist David Mann says the moves showed "evidence of a definite will [by China] toward increased liberalization. We've seen the lending [rate] ceiling being removed. That we would take as a positive step and therefore that's good news in terms of expecting more liberalization, including exchange rate liberalization, for next year." China's government has been striving since late last year to rein in strong economic growth. The country also is under pressure, notably from the United States, to move toward a more flexible exchange rate. The Chinese currency is pegged to the dollar, which critics say artificially weakens the cost of Chinese exports -- making them more competitive -- while increasing the cost of imported goods in China. Copyright Agence France-Presse, 2004

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