Fast industrial growth increases pressure for rates hike

Updated: 2007-06-15 09:52

An unexpected pick-up in the industrial production in May, coupled with rising inflationary pressure and enlarging foreign trade surplus, has made a case for further monetary tightening by China's central bank.

On Thursday, the National Bureau of Statistics reported that industrial production grew 18.1 percent in May from a year earlier. The figure came hours after Premier Wen Jiabao said further steps are needed to cool the economy.

Wen said Wednesday that monetary policy needs "moderate tightening," underscoring predictions that the central bank will once again raise the interest rates in order to put brakes on the sizzling economy.

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"Financial, fiscal and taxation measures should be employed to guide the flow of capital," Wen said. "There should be more channels for capital outflow and for the use of foreign exchange." 

It is believed that record trade surpluses have pumped money into the financial system, stoking investment, inflation and a stock market boom.

"Monetary tightening of some form is now imminent," said Wang Qing, chief China economist at Morgan Stanley in Hong Kong, quoted by the Bloomberg News. 

A reference by Wen to tax measures may suggest the government plans to reduce or eliminate a 20 percent tax on interest earned on bank deposits to stem the flow of money to the stock market, Wang said.

The benchmark one-year lending rate is 6.57 percent and the deposit rate stands at 3.06 percent after two increases this year. The central bank has also ordered lenders to set aside more reserves five times this year.

In response to the industrial production figures, the CSI 300 Index of stocks closed down 1 percent.

China's economic problems include "rapid growth in industrial production and the trade surplus, fast investment growth, excessive liquidity, increasing inflationary pressure and energy conservation challenges," Wen said Wednesday.

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