China hikes rates against inflation

08:43, April 07, 2011      

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A clerk counts the cash at a bank in Shunqing District, Nanchong City of southwest China's Sichuan Province, April 6, 2011. The People's Bank of China, the central bank, announced Tuesday it would raise the benchmark one-year borrowing and lending interest rates by 25 basis points beginning Wednesday.This was the second time the central bank raised the benchmark interest rates this year and the fourth increase since the start of 2010. After the increases, the one-year deposit interest rate will climb to 3.25 percent while the one-year loan interest rate will reach 6.31 percent. (Xinhua/Li Xiangyu)

The Chinese central bank's move to raise the benchmark interest rate drew diverging views from economists, and set the country's equity markets above a key psychological barrier on Wednesday.

The increases of banks' one-year borrowing and lending rates by 25 basis points take effect beginning Wednesday. The benchmark Shanghai Composite Index rose more than 1.1 percent to close at 3,001.36 points during the day.

"The rate hike by the People's Bank of China (PBOC) came a little bit earlier than we had anticipated, " said Lu Zhengwei, chief economist for Industrial Bank Co., Ltd

A report by the Industrial Bank warned that the continuing monetary squeeze-out is gradually showing negative accumulative effects on the economy. The report also says that the economic slowdown is one of the "major risks" that needs close attention.

To counter persistent inflationary pressure, the PBOC, China's central bank, has adopted a series of tightening measures this year, including hiking interest rates twice, raising banks' reserve requirement ratio three times and appreciating currency.

Also on Wednesday, the Chinese currency Renminbi (RMB), or the yuan, rose 31 basis points from last Friday to a record high of 6.5496 per U.S. dollar.

Li Huiyong, a chief macroeconomic analyst for Shenyin & Wanguo Securities, said the PBOC's move suggests the country's inflation situation is worsening.

Li predicted the March Consumer Price Index (CPI) could hit a record high of 5.3 percent amid soaring oil and grain prices in global markets, adding to China's pressure to continue its macro control policies.

The CPI, a major gauge of inflation, jumped 4.9 percent in February from the previous year, exceeding the government's full-year target of 4 percent. The National Bureau of Statistics will release China's CPI figure for March and other quarterly economic data next week.

According to economists' projections, China's March CPI will climb above 5 percent, or even as high as 5.6 percent.

Hua Zhongwei, a macroeconomic analyst for Huachuang Securities, said the central bank's rate hike fit his expectations as the increase will help improve the country's "negative interest rate" in real terms and stabilize inflation expectations.

After the rate hike, the interest rate of one-year deposits in Chinese banks was 3.25 percent, compared to the inflation rate of 4.9 percent in February.

"As the Purchasing Managers Index reading in March suggests, continuous tightening measures did have an impact on the development environment for medium- and small-sized enterprises," Hua said.

Growth of order backlogs and inventory levels are accelerating over 4 percentage points faster than February, pointing to slower growth of manufacturing activities, according to the China Federation of Logistics and Purchasing (CFLP).

China's leading index, a measure of the economy's outlook, fell to 101 in February, the 11th consecutive month of declines.

Other economic indicators, such as industrial value-added output, retail sales, planned investment and exports, all signalled slower growth in February

Investment, exports and consumer spending are believed to be the three engines driving China's economic growth

The Chinese economy may slow down slightly month-on-month in the near future, but a significant comedown is less likely, Lu said.

"We predict China's economic growth to remain relatively strong at around 9.5 percent in the first quarter. And inflation control will continue to be authorities' top priority," he said.

Zuo Xiaolei, chief economist for Galaxy Securities, said it is difficult to forecast when authorities will end the macro control policy.

"There are a lot of uncertainties in the future," Zuo said, citing factors such as excessive global liquidity and strong expectations of inflation of agricultural produce in world markets.

"What we need to do is to closely observe the monthly data of aggregate effects of macro control policies that have been launched," she said. "A stable and healthy monetary policy will be the main theme for this year and it won't change because of a single month's data."

Source: Xinhua

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