No interest rate rise in sight

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Last updated at: (Beijing Time) Saturday, March 06, 2004

No interest rate rise in sight

People's Bank of China Governor Zhou Xiaochuan pledged on Friday the nation will not raise the renminbi interest rate in the short term.

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People's Bank of China Governor Zhou Xiaochuan pledged on Friday the nation will not raise the renminbi interest rate in the short term.

The central bank chief's remarks came in response to a debate among economists in recent weeks on whether the government needs to resort to a rate hike to counter continually rising consumer prices and investment growth.

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

China notched up 9.1 per cent economic growth last year, fuelled by 26.7 per cent growth in fixed asset investments.

Zhou, who also pledged to maintain the stability of the renminbi exchange rate, said the government would wait a few months to see the consumer price trend before making any decisions.

But he did not rule out the possibility of a future rate hike.

State Administration of Foreign Exchange Director Guo Shuqing echoed Zhou's remarks on rate hikes.

But he said this could become more likely if the CPI rises by a big margin in the coming months,.

Xu Hongyuan, a senior economist with the State Information Centre, agreed with Zhou and Guo, saying the interest rate would remain unchanged if CPI rises by about 3 per cent.

"But if the CPI rise is greater, a rate hike is possible," he said.

Yi Xianrong, a senior researcher at the Chinese Academy of Social Sciences, said there is little possibility that the country's CPI would rise rapidly.

"There is also no need to adjust the interest rate to balance supply and demand," he said.

Higher prices are bearable, as they help create a better environment in which State-owned companies will conduct reforms, he said.

The government has already taken a series of measures to control the money supply since last year, Yi said.

After increasing the money supply to keep the economy from growing too 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.

And the central bank also raised reserve ratios for commercial banks.

But Wang Zhao, a researcher with the State Council's Development Research Centre, said the possibility of raising the renminbi interest rate in the next few months still exists.

"There are already some early inflationary signs in the economy," he said.

Even if the government shifts the focus of its proactive fiscal policy from supporting economic development to sustainable development, this would increase the possibility of inflation, he said.

Song Guoqing, a professor at Peking University, said the government should have raised the interest rate already.

"If people feel the trend of price rise, they will rush to buy more goods," he said.

Panic purchasing will further increase commodity prices, he said. "Inflation will take place," he warned.

The government should adjust the interest rate in a timely manner, he said.

The benchmark one-year bank deposit rate currently stands at 1.98 per cent.

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

The lower interest rate would also have an impact on people's consumption behaviour, he said.

People would borrow money from banks to buy larger items like houses, in order to gain from future price rises.

This would stimulate demand, which in turn fuels inflation, he said.

The lower interest rate would also stimulate investment, some sectors of which are considered to be overheated, Song said.

Source: Xinhua

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