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Experts: China may raise interest rates
Updated: 2004-05-17 14:57

The prevailing view among Chinese economists is that China's central bank will have to raise interest rates to prevent a runaway economy and soothe growing inflationary pressures if the ongoing excess investment cannot be stopped.

"It depends on the economic trend whether there will be an interest rate hike," said Qiu Zhaoxiang, director of the financial research institute of the University of International Business and Economics.

He said that if the People's Bank of China failed to curb over-investment in such sectors as steel, property, cement and aluminumby other means, it would resort to rate increases just as developed countries have to meet similar situations.

Zhao Xijun, a financial expert from the People's University of China, agrees, saying that the central bank is waiting to see if the monetary methods it has taken -- largely increases of bank reserve requirements three times in a row since last September -- could yield ideal results, before a decision on interest rates rises is made.

In a latest central bank move, commercial banks' reserve requirement was raised to 7.5 percent from 7 percent beginning April 25, meaning a loss of 110 billion yuan (US$13.3 billion) in their available funds that could otherwise be used for lending. China still orders commercial banks to park part of their depositsin the central bank to guard against future operation risks.

Economists point out that the central bank, however, still has worries because interest rate increases would lure even more overseas capital into China to cash in on the already big rate gaps between Renminbi and foreign currencies including the US dollar, resulting in heightened pressures on Renminbi appreciation.

If more so-called "hot money" flows into China, the central bank will purchase it under the current stringent forex administration by releasing more Renminbi base money unwillingly, offsetting its efforts to rein in money supply.

So, experts believe the central bank will announce rate hikes --if needed -- after the US Federal Reserve does.

A rate rise would be the first since 1995 and would follow eight reductions during the past eight years that more or less halved the benchmark one-year lending rate to 5.31 percent.

In a recent report, the People's Bank said its prudent monetary policy stance will be tilted towards "moderate stringency" in the near term, vowing to take measures to mop up liquidity in the country' s financial system to prevent loan growth which was still in the fast lane.

But the new report promised no "one-size-fits-all cut" in credit and loan extension so as to avoid a boom and bust in the economy.

And the wording in the report, released a couple of days ago, was not that harsh and did not mention whether there would be an interest rate hike, pushing higher share prices in China's two stock bourses that day.

Lower CPI for third Quarter

China has posted price increases for some industrial goods as having been leveling off although they continue unabated for most items. Declining steel prices are especially a concern.

Overall, prices of industrial goods leaving the factory, measured by the producer price index (PPI), edged up 0.7 percent in April over March and rose 9.3 percent over the same month a year earlier.

Prices for most basic commodities such as food, minerals and fuel continued to rise, while those for consumer goods like televisions, washing machines and refrigerators were lower.

Propped up by food and raw materials price increases, China's consumer price index, the most widely watched barometer on inflation, rose a modest 2.8 percent year-on-year from January to March.

The Chinese government has set a 3 percent CPI increase target for 2004 and the central bank predicted that the index would continue to climb up after April because of the "spill-over" factor and a lower comparative base from the same 2003 period, when the Chinese people encountered the SARS outbreak, but the CPI would fall starting from the third quarter.

Lending goal could be reached

Nationwide investment in fixed assets including capital projects and factory equipment soared an annualized 43 percent in the first quarter, which the central bank blamed partly on some departments and local governments neglecting central government calls and keeping investing heavily to highlight their political achievements.

Banks doled out 835.1 billion yuan (US$100.6 billion) in new loans in the first quarter, representing 32 percent of the annual target and an increase of 24.7 billion yuan (US$3 billion) from a year ago.

The outstanding broad money, or M2, including money in circulation and all deposits, surged 19.1 percent year-on-year to 23.36 trillion yuan (US$2.8 trillion) by the end of April.The increase was almost equal to that of March.

By tightening monetary policies, the central bank said its annual targets -- letting both M2 and M1 grow 17 percent and commercial banks' lending add 2.6 trillion yuan (US$313.3 billion) -- could be reached.

It said the impact of its policy initiatives such as higher bank reserve requirement and open market operations including issuance of central bank bills and treasury bonds trade would be felt later.

To brake the economy is not the task confined to the central bank. The State Development and Reform Commission issued recently a regulation on controlling rush investment and clearing away copy-cat projects; and the Ministry of Land and Resources recovered more than half of China's 6,015 development zones last year and has stopped the approval of the establishment of new such zones.

China's economy -- now the 6th biggest in the world and 2nd in Asia -- expanded 9.7 percent in the first three months, well abovethe government target of 7 percent for 2004. "In general the economic outlook is sound, characterized by a continued, fast growing GDP and upgraded economic efficiency," noted the central bank report.

And the report mentioned that the Renminbi exchange rate had been kept basically stable at a reasonable equilibrium.

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