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No need to raise RMB interest rates for now
By You Nuo (China Daily/Hong Kong Edition)
Updated: 2004-07-09 15:47

Contrary to popular belief overseas that RMB interest rates would take the cue from the recent hike in US rates, many mainland economists say that there is no need to follow suit; at least, for the time being.

It must be remembered that the US rate hike was very mild, a modest quarter point; and at the same time, China's monthly inflation rate has not yet exceeded the danger line of 5 per cent. In addition, high-level economic studies suggest that the mainland may be able cool down its economy without changing its interest rates; and that inflation would head south in two months.

Qin Chijiang, a veteran economist, believes China's present inflation rate, the CPI (Consumer Price Index), should be about 4.4 per cent year on year. It would be around this level if the May-June statistics were rounded up - something the National Statistics Bureau has not done. If it does exceed 5 per cent, he says, then an RMB rate hike would be a more likely policy option.

So the CPI is the key, and when it reaches 5 per cent year on year, it will set off alarm bells, according to Qin, senior adviser to the State Council and long-time adviser to the Ministry of Finance.

But Qin believes the mainland still has time before it decides whether an RMB rate increase is warranted, while the present US interest rates may not affect China's international balance of payments significantly. At the same time, projections released by high-level government think-tanks suggest that the mainland's CPI will level off in August, even if nothing is done between now and then to adjust interest rates.

Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Institute of Finance, said timing is important. Even if there is to be an interest-rates hike, it must done at an appropriate time, and done smoothly - not based on any changes in US interest rates. Raising rates too quickly would be perceived as administrative interference, he says.

Yi's colleague Wang Songqi, also a researcher with the CASS Institute of Finance, says the Federal Reserve's latest hike would certainly affect the region, but its effect on the mainland's economy still depends on the mainland's own inflation rate. Meanwhile, some economists point out that interest rates adjustments on the mainland tend not have much effect because those who depend heavily on credit for their operations will continue to depend on it anyway - local governments and investment projects they have sponsored, in particular.

There is also the danger that if RMB rates are raised too quickly, it may attract a greater influx of dollar-denominated overseas capital to the mainland, resulting in either pressure for a revaluation of the RMB or, if it is money under the control of private investors, finding its way into black-market credit supplies. At the same time, there are increasing calls from the local press for the government to halt efforts to slow the economy, since the inflation rate has not reached dangerous levels and the nation needs robust economic growth to generate a massive number of new jobs.

In an attempt to provide assurances that healthier growth is on the way, Vice Premier Zeng Peiyan told the CPPCC (Chinese People's Political Consultative Conference) National Committee last week that Beijing's macro-economic readjustment is already doing its job, implying that no more harsher measures are needed.

The optimism about the macro-economic policies' effect in slowing down the economy comes from figures in May, which showed that China's investment in fixed assets saw a decline of 15.4 per cent year on year.

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