China needs to focus on rate rises - think-tank

Updated: 2007-05-14 10:04

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China's monetary policy now needs to focus primarily on gradually raising interest rates to trim liquidity and prevent the economy from overheating, a government think-tank said in a report published on Monday.

The Macroeconomic Research Institute, a think-tank under the National Development and Reform Commission, said there was now limited room for China either to raise banks' reserve requirements or issue central bank bills in absorbing liquidity.

China has raised interest rates three times in just over a year; since last June, it has increased the amount commercial banks must park with the central bank as reserve seven times.

The China Securities Journal quoted the institute as saying that the cost of issuing central bank bills was increasingly high and that the reserve ratio was nearing a record high.

"The key to monetary policy in the next phase will be to use interest rates to tighten liquidity from the demand side, by gradually raising rates -- so as to avoid the worsening of asset bubbles and to keep the economy from going from 'overly fast' to 'overheating'," the newspaper said in an abstract of the report.

The think-tank also said China did not need to be overly concerned about a short-term surge in consumer inflation; instead, the government should be highly vigilant on the development of asset bubbles.

"The authorities should pay high attention to the fast growth in asset prices, especially increasing risks buried under the prosperity of the real estate and stock markets," it said.

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