By Xin Zhiming (China Daily)
Updated: 2007-07-23 08:20

China decided to raise interest rates and cut the withholding tax on interest income on Friday in a coordinated move to get the blistering economy onto a healthier footing.

The benchmark one-year deposit and lending rates of commercial banks will be raised by 0.27 percentage point, effective from Saturday, the central bank said in a statement on its website.

Meanwhile, the State Council, reduced the withholding tax on interest income to 5 percent from 20 percent as of August 15.

The National People's Congress authorized the government to change or abolish the tax last month.

The interest rate hike was the third this year. It will take the one-year benchmark deposit rate to 3.33 percent from 3.06 percent. The one-year lending rate will rise to 6.84 percent from 6.57 percent.

The interest rate on demand deposit was also raised from 0.72 percent to 0.81 percent, which was not been seen since 2002.

The combined move was not unexpected after the country released its macroeconomic statistics for the first half of this year, said Dong Yuping, an economist from the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS).

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The National Bureau of Statistics (NBS) said on Thursday that the nation's gross domestic product grew by a sizzling 11.5 percent in the first six months and its consumer price index (CPI) rose by 4.4 percent in June, the highest in more than two years, and 3.2 for the January-June period. China's fixed-asset investment increased 25.9 percent during the same period.

The high CPI figures are especially worrisome as the prices of foodstuffs, such as pork, egg and grain, have soared in recent months, analysts said.

Food prices, which account for about one-third of the CPI basket, rose 11.3 percent in June, when pork prices rose 59.8 percent and egg prices went up 37.9 percent, according to the NBS.

The NPC's Financial and Economic Affairs Committee warned before the release of the figures that the economy has shown more signs of overheating, seen as a strong signal that tightening measures are in the pipeline.

Since the real interest rate has long fallen into negative territory, the adjustment in deposit interest income tax is just normal, Dong told China Daily.

The adjustment equals about two interest rate hikes of 27 base points each and, combined with the interest rate hike, will help hold back strong investment and lending, he said.

"Given the strong economy, any single adjustment alone will not be enough."

The government has not abolished the tax on deposit interest income because it may want to test the waters to see the impact of its macroeconomic regulation.