China Boosts Key Interest Rates

Central bank raised interest rates in hopes of cooling down the economy and calming inflation worries.

BEIJING (AP) - China's central bank raised its key interest rates Friday, as the government tries to reel in its runaway economy and stem inflation worries.

A day after the government said the economy grew in the second quarter at its fastest pace since 1995, the central bank said it will raise its one-year yuan lending rate to 6.84 percent from 6.57 percent.

The one-year yuan deposit rate will go to 3.33 percent from 3.06 percent.

The changes take effect Saturday, the People's Bank of China said in a statement on its Web site.

The rate hikes were followed by China's State Council, or Cabinet, saying it will cut the tax paid on interest income to 5 percent from 20 percent beginning Aug. 15.

The cut may encourage Chinese investors to keep their money in banks rather than in the country's booming stock market.

The change was made ''in line with the needs of national economic development,'' the council said in a statement on its Web Site.

Friday's interest rate increase is the fifth time since April 2006 that the central bank has raised key interest rates.

''The rates will be conducive to guiding monetary credit and investment growth in a reasonable manner. They will regulate and stabilize inflation expectations and maintain stable price levels,'' the Bank of China's statement said.

The bank last raised rates in the middle of May.

Economist Stephen Green of Standard Chartered called the rate hikes ''a widely anticipated moved after yesterday's super-fast GDP growth numbers.''

Thursday, the National Bureau of Statistics reported that the economy expanded by 11.9 percent in the April-June quarter over the same period of 2006, even faster growth than the previous quarter's 11.1 percent.

Inflation also rose, with consumer prices climbing by 4.4 percent in June. The economy also was under pressure from a swollen trade surplus and high energy consumption, the National Statistics Bureau said.

''We will further enhance and improve macro control and put into practice various policies set by the central government,'' Li Xiaochao, a statistics bureau spokesman, said at a news conference in announcing the figures Thursday.

China's communist leaders want fast growth to reduce poverty but are trying to cool some industries. They worry that runaway investment could push up inflation or ignite a debt crisis if borrowers default. Besides the interest rate hikes, they have also imposed investment curbs on some industries.

The rise in consumer prices, lifted by a 7.6 percent jump in food costs, was well above the official target of 3 percent.

Chinese leaders are worried about the political impact of rising food prices, which hit the poor, populous countryside especially hard.

Last week, Beijing increased its estimate of 2006 gross domestic product growth from 10.7 percent to 11.1 percent, bringing China closer to overtaking Germany as the world's third-biggest economy behind the United States and Japan.

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