China raises rates, shrugs off slowing growth (Reuters)

BEIJING (Reuters) – China raised interest rates for the third time this year on Wednesday, making clear that taming inflation remains a top priority even as the growth pace of its vast economy gently eases.

The 25-basis-point increase in lending and deposit rates underscored China's quiet confidence that the world's second-biggest economy is resilient enough to endure tighter monetary policy and is not threatened by the hard landing that some investors fear.

Analysts suggested China was close to, or even at the end, of a cycle of rate rises and the latest move was a pre-emptive strike before another big jump in inflation in data next week heightens depositors' worries about low yields.

"Today's rate hike suggests that China's June inflation could be higher than expected and the second-quarter GDP remains solid, consistent with our expectation," said Ligang Liu, head of Greater China economics at ANZ in Hong Kong.

"The rate hike will help the PBOC to fine-tune its monetary policy by alleviating the worsening negative real interest rate problem so as to prevent an outflow of deposits from the banking system."

The latest move increases China's benchmark one-year lending rate to 6.56 percent, and its benchmark one-year deposit rate to 3.5 percent, the central bank said.

The increases will take effect from Thursday, the central bank said in a short statement on its website.

Risky assets, particularly those with direct links to China's growth such as the Aussie dollar, sold off after the announcement, reacting to concerns this latest monetary tightening will choke an already sluggish global economy.

China-watchers couldn't agree on whether there will be more rate rises in the second half of the year. The People's Bank of China (PBOC) has raised banks' reserve requirements nine times in addition to these rate rises in its nine-month cycle of tightening monetary conditions.

"China's inflation battle is almost at an end. Already, there are signs that price pressures are coming off," said Frederic Neumann, an economist at HSBC in Hong Kong. "Today's rate hike may therefore have been the last in the cycle,"

GROWTH VERSUS INFLATION

Hopes that the PBOC may be near a pause in tightening was seen as a positive for stocks and could halt the rise in yuan onshore swap rates. Such expectations have helped the Shanghai Composite index bounce from nine-month lows hit in June.

The world's second-biggest economy expanded more than 10 percent last year but has cooled in 2011. First-quarter growth was 9.7 percent and data next week is expected to show the pace eased to 9.4 percent in the second quarter.

Evidence is growing that China's vast manufacturing sector is losing momentum, due both to tighter policy at home and slowing demand overseas.

A survey of purchasing managers showed the factory sector expanded at its weakest pace in 28 months in June, mainly owing to a drop in new orders. Many analysts reckon the pace is in keeping with an economy expanding on average at around 9 percent and industrial growth of around 13 percent.

Moreover, a double-digit increase in wages is expected to feed into already strong domestic demand.

With U.S. interest rates near zero, Beijing worries it might attract more speculative funds into China if it raises rates too far. That would exacerbate the problem of excess liquidity and further fuel inflation.

Equally, it has to placate depositors struggling with a negative real rate of return on their cash in banks.

China's inflation quickened to a 34-month high of 5.5 percent in May as elevated food prices and a red-hot property market kept price pressures alive.

A Reuters poll forecast data due on July 15 will show that inflation in June rose to 6.3 percent -- its highest reading since mid-2008. Many economists estimate inflation will peak in June or July.

Beijing is especially sensitive to rising prices that might stir social unrest and threaten its leadership.

Wang Jun, an economist at CCIEE, a government think tank, said Beijing may feel compelled to raise rates again if inflation, proves more stubborn than expected.

"If inflation comes down, there will be no need to raise rates. But if prices rebound, there could be further rate rises," he said.

(Writing by Koh Gui Qing and Vidya Ranganathan; Editing by Ruth Pitchford and Neil Fullick)

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China's Hu says Party survival rests on growth, stability (Reuters)

BEIJING (Reuters) – China's ruling Communist Party must ensure economic growth and its iron grip on stability do not slacken, President Hu Jintao said on Friday, using the party's 90th anniversary as a show of unity ahead of a tricky leadership succession.

"Development is of paramount importance and stability is the paramount task," Hu told hand-picked party members inside Beijing's cavernous Great Hall of the People, in a speech carried live on state television.

"Without stability, nothing can be accomplished, and the achievements that we have made will be lost. All of the party's comrade's must take this message to heart, and they must also lead all the people to take this to heart," he said.

"Only by promoting both healthy and fast economic development can we secure a strong material foundation for the great revival of the Chinese nation."

The party has shown no sign of diluting its own vast powers before a big political shake-up late next year, when Hu will hand over power, most likely to Vice President Xi Jinping.

Xi gave a short introductory address before Hu took the stage, to congratulate model party members.

Hu's predecessor, Jiang Zemin, did not attend the ceremony, possibly a sign of the 84-year-old's declining health. Hu, aged 68, is also beginning to show his age, despite the jet-black head of hair that all central leaders sport, thanks to dye.

China launched a wave of propaganda in the weeks leading up to the anniversary, producing slick films and decking out Beijing with banners lauding party rule and the progress the country has made since the 1949 revolution.

While Premier Wen Jiabao, who is also preparing to retire, has made a habit recently of more directly calling for political reform than his more cautious comrades, the party appears in no mood to listen.

"Looking back at the progress that China has made over 90 years, we can reach one fundamental conclusion -- that the key to properly managing China's affairs lies in the party," said Hu, who oversees the world's largest political party, with 80 million members.

"We have every reason to be proud of what the party and the people have achieved, but we have no reason to be complacent. We must not and will never rest on our laurels."

Yet despite some oblique sniping between provincial leaders vying for a place in the next central leadership, Hu has presided over a strikingly disciplined group of top leaders, said Kerry Brown, head of the Asia Programme at Chatham House, a London foreign policy institute.

"Some pundits try to create a drama, when in fact the most interesting thing is the absolute, icy stillness at the center," said Brown, who is writing a biography of Hu.

"With the things that are going on, and all of the problems, there must be pretty passionate debates, but we don't get a sign of it," he said in a telephone interview.

"CONFLICTS AND PROBLEMS"

After some muted moves to give citizens stronger legal protections early in his time as president, Hu has made enforcing firmer control over China's increasingly diverse and fractious society a feature of his time in power.

The last few months have been marked by arrests and detentions of dissidents, human rights lawyers and long-time protesters, following calls online for Arab-style "Jasmine protests" in China.

Hu warned about the strains buffeting party rule as the consequences of economic transformation courses through Chinese society.

"Currently China is undergoing an unprecedentedly broad social transformation. At the same time as bringing tremendous vitality to our country's development and progress, this will also inevitably bring all kinds of conflicts and problems."

Despite China's robust economic growth, its communist leaders worry that their rule could be eroded and eventually challenged by social unrest and elite schisms and send it the way of the Soviet Union which collapsed two decade ago.

The country saw almost 90,000 "mass incidents" -- riots, protests, mass petitions and other acts of unrest -- in 2009, according to a 2011 study by two scholars from Nankai University in north China. Some estimates go even higher.

By contrast, in 2007, China had more than 80,000 mass incidents, up from over 60,000 in 2006, according to an earlier report from the Chinese Academy of Social Sciences.

"The whole party must see with crystal clarity that the conditions facing the world, the country and party are undergoing profound changes, and that under these new circumstances we face unprecedented new circumstances and challenges," Hu said.

(Additional reporting by K.J. Kwon; Editing by Alex Richardson)

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China manufacturing slows: omen for weaker growth (AP)

SHANGHAI – Chinese manufacturing slipped to its slowest pace in 28 months in June, sapped by inflation-fighting curbs on credit and weaker overseas demand, according to surveys released Friday.

The China Federation of Logistics and Purchasing said its monthly purchasing managers index fell to 50.9 in June from 52 in May, 52.9 in April and 53.4 in March. The index has remained above 50, the benchmark for expansion, for 26 straight months.

The report said the trend likely augurs a further slowdown in growth brought on by inflation-fighting curbs on credit.

London-based HSBC said its survey of 400 companies, which is adjusted for seasonal factors, signaled a decline in manufacturing production for the first time since July 2010, though the pace of decline was marginal.

The HSBC index slipped to 50.1 in June from 51.6 in May, with the slowest increase in new orders in 11 months, it said, attributing the weakness to subdued global demand. But input cost increases also slowed, reducing inflationary pressures.

The reading for June "implies that policy tightening is working, pointing to a peak of inflation in the coming months," Hongbin Qu, chief economist and head of Asian Economic Research at HSBC, said in a statement.

The government-affiliated Federation of Logistics and Purchasing said its survey showed declines were greatest in the production, new orders, purchasing volume and prices for raw materials indices. The survey also showed a contraction in production of chemicals, textiles, and transportation equipment. Imports and new export orders also slowed.

The survey "indicates that future economic growth may continue to decrease," federation analyst Zhang Liqun said. But he said the results of the survey did not suggest China would face a "deeper correction."

Driven by double-digit surges in food costs, inflation rose to a 34-month high of 5.5 percent in May. After months of forecasting it would moderate by midyear, China is expected to announce inflation in June surged above 6 percent.

Many inside China expect authorities to raise key interest rates sometime soon, in a fifth hike since October, to counter surging costs. Beijing has repeatedly ordered state-owned banks to boost their reserves, aiming to curb excess credit.

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