Fast industrial growth ups pressure for rates hike

Updated: 2007-06-14 16:34

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.

The economy expanded 11.1 percent in the first quarter. Last year's 10.7 percent growth was the fastest in 11 years. Inflation accelerated in May to 3.4 percent, the highest in more than two years.

Monetary policy needs to be "stable with moderate tightening" to prevent the economy from overheating, the premier said.

"This is definitely an important signal, as it is the first time a top government official has mentioned `moderate tightening,"' said Morgan Stanley's Wang. The previous official language was "prudent fiscal and monetary policy."

The trade surplus rose a bigger-than-estimated 73 percent in May from a year earlier to $22.45 billion. A stronger yuan would help narrow the gap. The U.S. Treasury Wednesday night refrained from labeling the country a currency manipulator in a semiannual report on exchange rates, angering some lawmakers who want faster appreciation and are proposing sanctions.

"More than half of China's industrial production is for export purposes and the trade surplus was quite large last month," said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. "But the big jump may also mean an acceleration in fixed-asset investment."

Factory and property investment probably grew 25.4 percent in the first five months from a year earlier, according to a Bloomberg News survey. The statistics bureau will release the figures at 10 a.m. Friday.

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