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Interest rate rise depends on economic trend
(Xinhua)
Updated: 2004-05-17 14:26
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 aluminum by 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
deposits in 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.
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