China to step up efforts to cool economy, analysts say

09:00, January 25, 2010      

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China is expected to further clamp down on rampant lending in the months ahead and possibly even raise interest rates to prevent its blistering economy from overheating, analysts said.

The prospects for a fiscal tightening have increased following the release Thursday of data showing the world's third-largest economy expanded by 8.7 percent in 2009 and 10.7 percent in the fourth quarter, analysts said.

The fastest quarterly growth rate in two years and the biggest rise in inflation in 13 months has increased the chances of further tightening measures as Beijing seeks to maintain steady economic growth, analysts said.

"We expect inflation to continue rising throughout this year, with additional tightening steps including rate hikes," said Citigroup economists Ken Peng and Shen Minggao in a research report.

Beijing moved this month to calm growing inflationary pressures and the threat of asset bubbles caused by soaring bank lending, which last year nearly doubled from 2008.

The People's Bank of China Thursday raised the interest rate on its benchmark three-month treasury bills for the second time in two weeks in a bid to deter new lending, after an earlier move on benchmark one-year treasury bills.

Chinese banks have been ordered to increase their capital reserves – effectively limiting the amount of money they can lend out – amid mounting fears over bad debts as consumers go on a spending spree on property and cars.

As economic growth heats up, analysts said they expect policymakers to push reserve ratios even higher and further increase rates on treasury bills before resorting to more aggressive measures such as hiking interest rates.

"We look for a minor acceleration in quantitative tightening through lending restrictions and raising the reserve requirement ratio," said Credit Suisse research analyst Tao Dong. He said interest rates would likely stay on hold until inflation rises above three percent or the US Federal Reserve raises its own rates, Tao said.
China's consumer price index rose 1.9 percent year-on-year in December and analysts expect full-year 2010 inflation to exceed three percent.

Source: Global Times
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