China to raise interest rates again - survey

Updated: 2007-06-05 14:03

China may raise lending and deposit rates at least once more this year to cool investment and curb asset bubbles, a survey showed.

Benchmark one-year borrowing costs will rise from 6.57 percent and deposit rates from 3.06 percent, according to 21 of 25 economists surveyed by Bloomberg News. The central bank may order lenders to set aside more money as reserves at least two more times, 16 economists said.

China is trying to stop money from record trade surpluses fueling stock or property bubbles and overcapacity in manufacturing. Inflation has outpaced after-tax returns on bank deposits, encouraging stock market speculation that's driven the CSI 300 Index to a 72 percent gain this year. The benchmark fell 7.7 percent Monday.

"Raising deposit rates by 27 basis points to quell the liquidity inflow into the stock market is like trying to dam the Yangtze River with a matchstick," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "And if equity markets cool, the risk is of a rebound in property."

The People's Bank of China last month raised the key one- year deposit rate by 0.27 percentage point to just above April's inflation rate of 3 percent.

The key one-year lending rate rose by 0.18 percent -- the first time since 1993 that the central bank had raised borrowing costs by less than deposit rates.

Stock Market Timing

The timing of rate increases will depend on the stock market, Wang Qing, an economist at Morgan Stanley in Hong Kong, said in a note Monday.

The CSI 300 Index has tumbled 16 percent from a May 29 peak on an increased government tax on share trades and speculation a capital-gains tax is pending. The benchmark has doubled in the past six months.

"If the stock market quickly shrugs off the stamp duty hike, rebounds strongly and even tests new highs, the probability of an imminent rate hike would rise substantially," Wang said.

A 43 percent increase in pork prices in the first three weeks of May from a year earlier adds pressure on the central bank to raise rates to curb inflation, he said.

Banks' required reserve ratios -- the proportion of deposits they must set aside -- will increase from 11.5 percent, the survey showed. The central bank has raised the requirement five times this year.

Banks extended 1.8 trillion yuan ($235 billion) of new loans in the first four months, more than half the total for all of last year. Urban fixed-asset investment jumped 25.5 percent, accelerating from 24.5 percent growth in the whole of 2006.

The World Bank last week said China's asset market valuations "strengthen the case for tighter monetary policy and higher interest rates to tie up liquidity in bank deposits."

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