Economists Split on Likelihood China Will Raise Rates This Year
Economists are split on whether China will raise interest rates this year as the government tries to curb inflation without attracting money into an economy already flooded with cash.
Seven of thirteen economists surveyed yesterday by Bloomberg News expect lending and deposit rates to rise this year. Most expect the yuan's gains versus the dollar to accelerate and banks' reserve requirements to increase.
Interest-rate cuts by the U.S. Federal Reserve may flood the Chinese economy with “hot money'' by widening the gap between the two countries' borrowing costs, Yu Yongding, a former adviser to the People's Bank of China, said this week. That may mean the government will focus more on other methods to cool the pace of inflation, which tripled in 2007.
“The central bank will rely more on reserve requirements, administrative credit controls and possibly faster yuan appreciation to control liquidity and ease inflationary pressures,'' said Denise Yam, an economist at Morgan Stanley in Hong Kong. “The sharp rate cut by the Fed has limited the room for China to hike rates.''
China yesterday reported the fourth straight quarter of economic growth of more than 11 percent.
The Fed this week lowered its benchmark interest rate by three quarters of a point, its first emergency cut since 2001, to 3.5 percent, amid signs of a U.S. recession. It cut borrowing costs three times last year.
`Neutralizing Effect'
Yu, director of the World Economics and Politics Institute in Beijing, said the Fed's interest rate cut will “have a neutralizing effect on China's tightening monetary policy.''
The People's Bank of China raised interest rates six times in 2007 http://abc-cashadvance.com. The one-year lending rate increased to a nine-year high of 7.47 percent and the deposit rate to 4.14 percent.
“Lower U.S. rates could bring another wave of speculative capital inflows to China,'' said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. “This may fuel another round of asset and consumer price inflation.''
The benchmark CSI Index of shares surged 162 percent in 2007 before it fell 6 percent this year. Property prices in 70 major Chinese cities jumped 10.5 percent in December from a year earlier, the biggest increase on record.
Consumer prices rose 6.5 percent in December from a year earlier and 4.8 percent in all of 2007 on higher food and fuel costs, the statistics bureau said yesterday. In 2006, the inflation rate was 1.5 percent.
Trade Surplus
A higher yuan would lower import costs and reduce the trade surplus by pushing up export prices.
The yuan has risen 1.1 percent this year against the U.S. dollar to the strongest since the end of a peg in July 2005. Most of the economists surveyed expect gains to accelerate to at least 10 percent this year from 7 percent last year.
China's economy, the world's fourth largest, expanded 11.4 percent in 2007 from a year earlier, the fastest pace in 13 years, and 11.2 percent in the fourth quarter.
“China will continue to fight overheating risks and inflationary pressure in the economy,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. “The policy makers have clearly gained a degree of comfort with the yuan appreciation.''