Authorities to monitor price shifts before rate decision
By Xu Dashan (China Daily)
Updated: 2004-05-20 01:08

People's Bank of China Governor Zhou Xiaochuan said Wednesday that the central government will have to monitor prices before it decides to raise interest rates.

Zhou told the Beijing International Finance Forum that the central bank is continuing to monitor price fluctuations.

The central bank governor's remarks echoed those made last month by Vice-Governor Wu Xiaoling, who said that the People's Bank of China had no immediate plans to raise interest rates.

But Wu added that "if the inflation rate keeps rising, leading to an actual negative lending rate, the central bank would consider raising lending interest rates from the current 5.3 per cent."

She said the central bank would keep a close watch on the movement of the consumer price index (CPI).

The central bank would consider raising interest rates "if CPI growth has caused a negative lending rate, which enables corporations to make money even after they pay back the principle and interest."

China's CPI, policy-makers' key inflation gauge, rose a year-on-year 3.8 per cent in April, the fastest growth in seven months.

A higher CPI increased the likelihood that the government would raise the interest rate.

Zhu Jianfang, a senior economist at China Securities, said there would be the possibility of an interest rate rise if CPI remained at 3 per cent or higher over the next few months.

China has taken a raft of measures since last year to try to cool down the economy, including raising bank reserve requirements three times and curbing unwanted fixed asset investment projects.

Recent moves to cool growth have included the issue of tighter restrictions on new projects in "overinvested" industries like property and steel and ordering banks to keep more money in reserve instead of lending it.

Although the measures had started to have an impact, they were not strong enough to rule out the prospect of a rate rise, experts said.

Wu Xiaoqiu, a professor at Renmin University of China, claimed the economy could only be cooled down by an interest rate increase.

"Compared with raising bank reserve requirements, the impact of raising the interest rate is more direct," he said.

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

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

Even if the government's proactive fiscal policy shifts its focus from supporting economic development to sustainable development, this would increase inflationary pressures, he said.

Fan Gang, director of the National Economic Research Institute, said an overheating of some industries including cars, steel, aluminum and cement could have serious economic repercussions.

Excessive growth in some sectors was putting a strain on transportation and power suppliers and driving up the prices of raw materials, he said.

The government could use administrative measures to rein in fast fixed asset investment, because some projects were funded by local governments, he said.

The government could also use both monetary and fiscal policies to cool down investment, he said.

Yuan Gangming, a senior economist at the Chinese Academy of Social Sciences, said the government should have already raised the interest rate to deal with increasing inflationary pressures.

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

The benchmark one-year bank deposit rate is currently set 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 impact on people's consumption habits, he said.

But Yi Xianrong, another economist 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 demand and supply," he said.

Currently high prices are bearable and help create a better environment for the reform of State-owned enterprises, he said.

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