Experts: China may raise renminbi interest rate

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Last updated at: (Beijing Time) Monday, February 23, 2004

Experts: China may raise renminbi interest rate

There is a possibility that China might raise interest rates this year to counter continually rising consumer prices and investment growth, experts said.

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There is a possibility that China might raise interest rates this year to counter continually rising consumer prices and investment growth, experts said.

The country's consumer price index (CPI), policy-makers' key inflation gauge, rose a year-on-year 3.2 percent in January and last December, the highest since April 1997 when it was also up a year-on-year 3.2 percent.

Higher consumer prices would have a negative impact on consumer habits, said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences.

Due to increasing worries on further price hikes, people try to save as much money as possible, he said.

However, the benchmark one-year bank deposit rate is set at 1.98 percent.

"People are losing out when they save their money in banks because of low interest rates ," he said.

Last year, the CPI rose a year-on-year 1.2 percent.

"There are some early inflationary signs," said Wang Zhao, a researcher with the State Council's Development Research Centre.

The government's proactive fiscal policy, even if it shifts its focus from supporting economic development to sustainable development, would add fuel to the possibility of inflation, he said.

He added that fiscal policy stimulates both investment and consumption.

Qiu Zhaoxiang, a professor at Beijing's University of International Business and Economics, said the Government needs to adjust its interest rate policy to deal with the possible overheating economy and inflation.

China's economy, fuelled by the 26.7 percent growth in fixed asset investments, grew a year-on-year 9.1 percent last year.

Investment in industries such as real estate, steel and cement has become overheated, he said.

The three economists agreed that if consumer prices and investment continues the rapid growth momentum in the months ahead, the central bank is likely to increase interest rates for the first time in eight years.

Zhou Xiaochuan, the governor of the People's Bank of China, said last week the Government would give key attention to curbing inflation this year.

"The central bank will use various instruments to adjust credit growth," the central bank governor said.

The Government has already taken a series of measures to control the money supply since last year.

After increasing the money supply to keep the economy growing quickly and fight the deflation which emerged during the Asian financial crisis of 1997-98, the central bank began tightening credit last year.

With the aim of further controlling the money supply, the central bank also issued a rule last year tightening controls on loans to the fast-growing real estate industry.

But commercial banks continue to lend aggressively to real estate industry in pursuit of bigger market share.

The central bank also required construction companies to stop letting developers use their working capital bank loans, a widespread practice it said had increased the construction firms' financial burdens, and only use them to buy construction equipment.

For home buyers, the central bank allowed commercial banks to raise downpayment requirements for their second homes, luxury housing and town houses.

Meanwhile, the central bank raised the reserve ratios for commercial banks.

The measures seemed to be working. Money supply growths lowed down in the past five months to January.

Earlier figures suggest that in January, the broader money supply, or the M2, grew 18.1 percent compared with the same month last year.

The growth rate was 1.2 percentage points lower than the same period last year.

Source:China Daily

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