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  China hikes interest rate on US dollar deposits  By Chuan Yu (China Daily)  Updated: 2005-12-28 06:32  
 
 China raised interest rates on US dollar and Hong Kong dollar deposits 
yesterday, a move that analysts say is a response to higher interest rates on 
the international market. 
 The People's Bank of China, the central bank, raised the upper limit for 
rates on one-year US dollar deposits to 3 per cent from 2.5 per cent. The 
ceiling on one-year Hong Kong dollar deposits was increase by 25 basis points to 
2.625 per cent. 
 
 
 
 
   A clerk counts US 
 dollar notes deposited by a customer at an office of the China 
 Communications Bank in Haian, east China's Jiangsu Province December 28, 
 2005. [newsphoto] |   The adjustments become effective Wednesday. 
This is the fifth time the Chinese central bank has raised interest rates on 
key foreign currency deposits this year, following a similar but smoother upward 
curve of rates in the United States. The dollar rate ceiling was a much lower 
0.875 per cent at the beginning of the year. 
 "Looking at the whole year, the policy intention is quite clear," said Zhang 
Xuechun, a Beijing-based economist with the Asian Development Bank. 
 Although China's monetary authorities do not give details about every policy 
move, Zhang said yesterday's hike was an effort to keep pace with the 
rate-hiking wave by the Federal Reserve in the United States. It would keep 
interest differentials from widening too much. 
 The Federal Reserve raised its target for its federal funds rate by 25 basis 
points earlier this month to 4.25 per cent, the 13th rate hike since June last 
year. 
 Zhang said another reason for the Chinese move was to encourage local 
residents to deposit more in foreign currencies instead of in the Chinese 
currency, the renminbi, to help reduce the upward pressure on the local 
currency. 
 "After the exchange rate reform, interest rate policy must be more responsive 
to smoothen exchange rate fluctuations," Zhang said. 
 China announced a long-awaited exchange rate reform in July 21, allowing the 
renminbi to appreciate by 2 per cent and linking the currency to a basket of 
foreign currencies instead of the US dollar alone. 
 Expectations for further renminbi appreciation remain strong, as major 
trading partners keep pressing China for a stronger renminbi, which they believe 
is undervalued. 
 The renminbi has been on an upward trend against the dollar since the reform, 
although movements in both directions are frequently recorded. 
 
 (China Daily 12/28/2005 page10)   
  
  
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