CHINA / National

China must raise interest rates further - economist
Updated: 2006-07-03 14:32

China must raise interest rates more aggressively to stifle demand for credit that has fuelled an investment boom, an influential government economist said in remarks published on Monday.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a top government think-tank, joined a chorus in support of raising borrowing costs to help ward off economic overheating after a slew of tightening measures in recent weeks.

"Many economic problems are a result of low interest rates and therefore raising bank lending and deposit rates would be the best method to resolve the problems," Yi was quoted as saying in a report posted on the official Web site (

"Raising bank lending and deposit rates is imperative."

In late April, the central bank raised the benchmark one-year lending rate to 5.85 percent from 5.58 percent in response to the faster-than-expected economic growth of 10.3 percent in the first quarter, but it kept bank deposit rates unchanged.

The rate rise was the first since October 2004.

Higher yuan interest rates may not necessarily spur inflows of speculative capital betting on the yuan, because the domestic currency market remained largely isolated due to the yuan's limited convertibility, Yi said.

U.S. interest rates exceeded Chinese rates by about 3 percentage points after the Federal Reserve last month lifted rates in its 17th straight quarter percentage point hike, but that failed to cool expectations of a stronger yuan, Yi said.

"China will enter a cycle of raising interest rates as other central banks have already entered such a cycle to tighten liquidity," Yi was quoted as saying.

Analysts say the People's Bank of China, the central bank, has been treading cautionsly to limit capital inflows that could put more upward pressure on the yuan.

The government had kept interest rates artificially low to help push through reforms at state-owned companies, Yi said.

Chinese economists and officials have been locked in heated debate on how the government should steer the economy, some suggesting the yuan should be allowed to rise faster.

Last week, Chen Dongqi, vice head of the Academy of Macroeconomic Research under the National Development and Reform Commission, urged the central bank to raise interest rates and said it could learn from moves made by the U.S. Feb.


Related Stories