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Central government to rein in investment

(China Daily/chinadaily.com.cn)
Updated: 2007-04-20 07:08
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A change in thinking

An interest rate hike could effectively curb the influx of speculative capital, thus deflating the bubble in assets prices, said central bank Vice Governor Hu Xiaolian on April 3.

That was interpreted as a strong signal for another interest rate rise within the year following an increase last month.

It also marked a major shift in the central bank's thinking on the impact of the interest rate on the influx of speculative money.

Previously, the People's Bank of China tried to maintain a three per cent spread between the benchmark interest rates of China and the US for fear that a decrease would result in the increase of more capital into the country, adding to pressure on the yuan to appreciate.

And so the bank was hesitant to hike interest rates. However, the US Federal Reserve ended a series of interest rate rises last August and was expected to lower the rate during the next Federal Open Market Committee meeting next month, making it hard for China to keep the three per cent rate gap.

Moreover, central bank officials began to realize speculative money does not go into deposits as previously thought, but flows highly speculative realty and equity markets.

Another factor is a low interest rate leads to a flood of bank deposits into the equity market, making the market more bullish.

Hu's remark was also noted as a change in the regulator's thoughts on the relationship between interest rate and asset prices.

The central bank paid close attention to asset prices in its decision making, but "asset prices are not the direct basis for monetary policy," said Assistant Governor Yi Gang in February.

An article in the Financial News, sponsored by the central bank, may also reflect a shift in thinking.

The monetary policy should not directly take asset prices as the ultimate goal, but should respond to the changes in assets prices in a correct and timely manner, the newspaper said last Saturday.

According to the article, the central bank will maintain a tight rein on the country's monetary policy, while paying close attention to excess liquidity and asset price.

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