Report: China to raise interest rates within 6 months
(Bloomberg.com)Updated: 2007-03-26 09:01
China, the world's fastest-growing major economy, is likely to raise interest rates at least once in the next six months to rein in the supply of money to curb asset bubbles, inflation and excessive investment in factories.
A trade surplus that may reach a record $200 billion in 2007 has swamped the financial system with cash, boosting the likelihood of boom-and-bust cycles in stocks and property. Premier Wen Jiabao has described investment growth as too fast and the economic expansion as unstable and environmentally unsustainable.
"Excessive investment growth may lead to overcapacity and therefore more bad loans," said Wang Qing, an economist with Bank of America Corp. in Hong Kong. "And there are the consequences of a deteriorating environment and worse pollution."
China's economy expanded 10.7 percent last year, the fastest pace since 1995, and contributed about a 10th of global growth. The trade surplus was $177.5 billion. The country is trying to boost domestic consumption to stop relying so heavily on exports and investment for growth.
Of those surveyed, 21 economists expect at least one more rise in interest rates this year. Fifteen expect an increase in the next six months.
The central bank on March 18 raised the benchmark one-year lending rate by 0.27 percentage point to 6.39 percent. It has increased bank reserve ratios five times in eight months. The US and Europe want the yuan to strengthen faster, which would make China's products less competitive in overseas markets, reducing the flow of cash into the country from export sales.
Money Supply
Money supply grew 17.8 percent in February, the fastest gain in six months. Yuan loans grew 17.2 percent, accelerating for the fourth month in a row. New lending was 981 billion yuan ($127 billion) for January and February combined, almost a third of the total for all of 2006.
Property prices in 70 major Chinese cities rose by 5.3 percent in February from a year earlier, led by a 9.9 percent surge in the southern city of Shenzhen.
The Shanghai and Shenzhen 300 Index, which tracks yuan- denominated shares on China's two exchanges, climbed 160 percent in the past 12 months. After a 9.2 percent slump on Feb. 27 that helped trigger a global rout in shares, the benchmark has rebounded by 10 percent and last closed at a record high.
Buying Stocks
People are switching money from bank accounts to stocks because the rate of inflation is similar to the interest paid on deposits. Consumer price inflation accelerated to 2.7 percent in February from 2.2 percent in January. The benchmark one-year deposit rate is 2.79 percent.
Nineteen of the economists surveyed expect the central bank to increase deposit rates at least once more this year.
Boosting interest rates may increase so-called "hot money" inflows from investors betting the yuan will continue to appreciate. The currency, also called the renminbi, has gained about 7 percent since the end of a decade-long peg to the US currency in July 2005.
Rising rates "make renminbi assets even more attractive," said Paul Cavey, an economist with Macquarie Securities Ltd.
China's currency reserves are the world's largest at more than $1 trillion. Goldman Sachs Group, Societe Generale SA and ING Bank NV expect the 2007 trade surplus to be at least $200 billion. The gap for February widened ninefold from a year earlier to $23.76 billion after exports soared 52 percent.
Premier Wen's Concerns
"China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced," Premier Wen said in Beijing on March 16. Energy efficiency and environmental protection issues haven't been "properly resolved," he said.
Administrative measures, such as land controls and environmental and energy-use hurdles for projects, are likely to become increasingly important as tools for cooling investment in 2007, according to Stephen Roach, chief economist at Morgan Stanley.
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