Out with the abacus in China's 25-bp rate rise

BEIJING Tue Oct 19, 2010 9:29pm IST

BEIJING Oct 19 (Reuters) - China shook global markets on Tuesday with its unexpected increase of interest rates, but the surprise was compounded for careful observers by the size of the move.

The increase was 25 basis points, the first time in modern history that Beijing adjusted deposit and lending levels by a number that was not a multiple of nine. In the past, the central bank typically raised rates by 27 basis points.

"The reason is that on the abacus, adding multiples of nine was much easier than adding multiples of 10. So the modern People's Bank of China inherited that special character from the old days," Ken Peng, an economist with Citigroup in Beijing, said.

"But clearly, computers and market participants may prefer rounder numbers," he said.

The central bank raised deposit rates at virtually every tenor by unusual amounts to leave lenders with nice, round numbers.

For example, the two-year lending rate was raised by 46 basis points to 3.25 percent, while the six-month rate was increased by 22 basis points to 2.2 percent.

"This reflects a changing method of calculating interest rates by commercial banks," said Gao Shanwen, chief economist at Essence Securities in Beijing. "It will give more flexibility to commercial banks."

Making rates divisible by five puts China in line with global standards, but those with a sense of history will regret what is being lost.

Joseph Yam captured the feeling of nostalgia when he was chief executive of the Hong Kong Monetary Authority.

"Although abacuses are not commonly used these days, the tradition lives on," he wrote in 2006 in an explanation of why rates were divisible by nine. "It is also another small challenge for those wishing to understand finance in China." (Reporting by Simon Rabinovitch and Aileen Wang: Editing by Neil Fullick)

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