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CICC report: tightening measures likely in Q2

By Li Zengxin (chinadaily.com.cn)
Updated: 2007-04-30 15:16

Analysts with China International Capital Corporation Ltd (CICC) believe China should adopt further tightening measures in the second quarter this year, and these measures will be more effective if the central bank and the foreign exchange manager can improve the liquidity monitor and control system and allow faster appreciation of renminbi.

According to the latest research release by CICC, China is likely to apply further tightening controls in the second quarter to make the full year M2 grow just under 16 percent, after a 17.3 year-on-year growth in the first quarter. And as the measures take bite in the second quarter, tightening policies may be relaxed in the third.

PhD Ha Jiming, managing director at CICC research department. [chinadaily.com.cn]

The restrained monetary policies adopted by the People's Bank of China will include central bank note issuance, bank required reserve ratio hikes, interest rate hikes and forex swaps, said Ha Jiming, managing director at CICC's research department, and the lead analyst and writer of the report.

There may be at least two benchmark interest rates increases in the rest of 2007, the first in May, and three required reserve ratio hikes at 50 basis points each, one in each quarter. Bank of China's forex swaps will be also applied as before as an important control instrument, added Ha.

The authors of the CICC report believe interest rate hikes are an effective monetary measure, and unlike what critics have said, it should indeed take consideration of asset prices, instead of merely looking at the consumer price index (CPI).

Ha explained the matter in two aspects: on the one hand, low interest rates do little to help stimulate consumption or diminish the effects of the urban income gap. Previous CICC research has found that raising interest rates will not depress the consumption ratio. Due to the declining real interest rate as a result of inflation rates rising faster than nominal interest rates, China's consumption ratio has in fact declined in recent years. In addition, mid to low-income earners are more adversely affected by the CPI inflation, as they spend a much larger proportion of their income on food, compared with high-income groups.