China raises cost of borrowing to try to cool economic growth

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China raises cost of borrowing to try to cool economic growth

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China’s central bank has raised its key interest rate for the first time in over a year.

The move is intended to try to cool down growth in the world’s fastest expanding economy.

The rate increase was not entirely unexpected. Speculation that something like this was coming had depressed Hong Kong’s stock market in recent days.

The People’s Bank of China raised the minimum rate that banks charge on one-year loans in local currency, the yuan, by 27 basis points, to 5.85%.

They last put it up, by the same amount, in October 2004.

The Chinese economy expanded 10.2% in the first quarter of 2006 compared with the same period a year ago.

Hefty lending by banks is funding much of that expansion raising fears of inflation.

The money is being invested in factories and roads leading to shortages of raw materials and an oversupply of property and manufactured goods.

The Beijing government is concerned that its state-owned banks which are already carrying a lot of debt could end up burdened with more bad loans.

The debt has been mostly built up during decades of state-directed lending to unprofitable companies.