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Interest rate rise too mild

15:33, April 06, 2011

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By Li Hong

Immediately after China's central bank announced its decision to raise the benchmark one-year interest rates by the quarter-percentage point beginning April 6, the public grievances about staggeringly rising inflation just do not die out. Skeptics say the tightening measure by Beijing is too mild to have any meaningful impact on easing runaway prices.

Many have suggested Beijing learn from other emerging economies and increase rates substantively to counterassault inflation. The piecemeal way of tightening, by ratcheting up key bellwether rates 0.25 percentage points every two months since October, is deemed too dovish, and will prove to be ineffective to rein in mounting inflation.

Some economists recommend China's decision-makers raise the rates by 0.50 percentage points apiece, and send a strong signal to the market that elevated prices of food and other commodities must be brought down, and the overheating real estate and other equities must be cooled.

The People's Bank of China, the central bank, said in a statement on April 5 that it would lift the one-year deposit rate to 3.25 percent, and the rate for one-year bank lending would be hiked to 6.31 percent. It is the fourth interest rate rise since October.

However, the move is widely believed too moderate, as it is insufficient to rectify a negative bank saving rates. China's inflation, according to the National Statistical Bureau, hovered at 4.9 percent in the first two months this year. Most analysts put the figure for March at 5.1 percent.

Premier Wen Jiabao's State Council, the cabinet, has made reining in inflation his government's top priority for this year, as he warned during an online chat early March that hefty price hikes across the board, if not controlled, would add to problems affecting social tranquility in China. Other hotly contested issues include the growing income gap between a small group of elites and the vast workers, and corruption.

When rising inflation is coupled with rising corruption, the discontent of the public rises too, Wen told a nationally televised news conference in mid March. And, it will have very negative implications for stability, he said.

A steadily growing mass of the bread-earners in China are slinging criticism at the central bank for its failure to control price jumps. It is understandable that they have aired displeasures as they are agonized by the rapid meltdown of purchase power of their petty wages.

Some even complain that Beijing had been dovish in winding down its unprecedented monetary stimulus, taken in the aftermath of the 2008 global financial crisis, for it always favors economic growth rates over ordinary people's livelihood.

As China's economy expanded at nearly 11 percent during the first six months in 2010, a clear sign of overheating, the decision-makers remained insensitive, refusing to push the pedal brake. The central bank did not raise the rates until mid October when urban property ran feverish, and prices leapt by a big magnitude.

At the same time, other emerging countries, worrying about the release of torrential liquidities by the U.S. Federal Reserve, and Japanese and European central banks in the desperate effort to jumpstart their lumbering economies, moved up their interest rates, timely and resolutely. Now, Brazil, the largest economy in Latin America, has raised its yearly saving rate to 11.25 percent, and, India's benchmark rate has been revved up to 5.75 percent, as compared to China's 3.25 percent.

Inflation is just like the tiger, economists claim. Once it comes out of the cage, it is difficult to put it back. Beijing has set a four percent inflation target for 2011 but private sector analysts say consumer prices could rise by up to 6 percent or more in the coming months, if monetary policy is not tightened.

Not all people loath inflation. Although the majority of consumers dislike inflation, equity gamblers chase it because stock and housing market bubbles will bring them new fortunes. Incomplete statistics show that global hedge funds, also called speculative “hot money”, at an amount of more than 160 billion U.S. dollars, has slipped to major emerging economies since 2009. About half of it is believed to have bought equities in China.

Doesn't the figure give us a clue that why China's housing prices have kept going up and up, stubbornly, in the past couple of years? But, not all know who bear the brunt of the bubble and inflation – our ordinary people are forced to pay more.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.


Dai MinJohn
Dai Min

John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.