China cools investments but surplus rises

HONG KONG - CHINA, which raised interest rates for a third time in 11 months this weekend, is discovering that solving one of its two main economic problems makes the other one worse.

The interest rate hikes and other measures are cooling investment in factories, real estate and other fixed assets, allowing Premier Wen Jiabao to claim partial victory in a fight against wasteful spending. Meanwhile, the trade surplus is ballooning.

The People's Bank of China raised interest rates to the highest in almost eight years on Saturday. But by curbing investment, Mr Wen has reduced demand for imported steel and cement for factories, exacerbating the trade imbalance and straining ties with the United States.

The third increase in borrowing costs in 11 months raised the benchmark one-year lending rate by a 0.27 percentage point to 6.39 per cent. The deposit rate climbed the same amount to 2.79 per cent.

The rate hike pushed the yuan up to a post-revaluation high against the US dollar yesterday. The yuan touched 7.733 to the dollar in early trade, its highest level since it was revalued and depegged from the dollar in July 2005.

'Risks remain skewed towards another 27 basis point rate hike this year,' said Ms Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. 'Yuan appreciation is part of the tightening policies that we expect.'

The US and Europe want the yuan to strengthen faster to make China's exports more expensive and global trade more balanced.

BLOOMBERG NEWS, REUTERS