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Interest Rate Rise Unlikely
China is unlikely to raise the renminbi interest rate this year, although the country's economy has made a turn for the better.
Wu Xiaoqiu, a professor at the Renmin University of China, in Beijing, said there is little chance of the nation increasing the interest rate because consumer prices are not expected to rise by more than 3 or 4 per cent this year.
The foundation laid for China's encouraging economic performance is not solid, he said. "There is an imbalance between the overall supply and demand."
Zhang Xueying, a senior economist at the State Information Centre, said the evidence was still weak that China had finally won its fight against deflation.
The consumer price index, Chinese policy makers' key inflation gauge, rose only 0.2 per cent year-on-year during the first 11 months of 2000, due largely to oil and steel price rises in the international market.
As late as last April, consumer prices fell 0.3 per cent from a year earlier, suggesting that the danger of deflation was not far off.
Under such circumstances, the government should be more concerned about how to maintain growth, said Chen Huai, a research fellow at the Development Research Centre under the State Council.
Stimulating social demand is a key part of current macro-economic management and keeping interest rates at a low level is one good way of reaching this objective, he said.
With the aim of increasing consumer spending, the Chinese central government has taken certain measures including increasing salaries, giving compensation to workers who have been laid off, and announcing week-long National Day and May Day holidays.
The Chinese central bank has announced seven successive interest rate cuts in the past few years.
It has also slashed interest rates on one-year deposits to 2.25 per cent.
In November 1999 there was a disguised interest rate cut in the form of a 20 per cent tax on income from bank deposits.
Another factor reducing the possibility of an increase in the renminbi interest rate is that the gap between it and foreign currency interest rates has been getting smaller, Chen said.
Last month, China's Banking Association, a self-governing organization consisting of the country's commercial banking companies, reduced the interest rate of some US dollar deposit accounts (those holding less than US$3 million) from 5.5 per cent to 5 per cent.
Last week, the US Federal Reserve reduced the Fed funds overnight bank lending rate from 6.5 per cent to 6 per cent.
The Fed's Board of Governors also cut the discount rate on Fed loans to banks by a quarter percentage point to 5.75 per cent.
The US dollar interest rate cut has left more room for the Chinese central bank to reduce the interest rates of foreign currencies on the domestic market in order to reduce the interest rate gap between renminbi and foreign currencies, Chen said.
Source: China Daily
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