China may raise interest rates for first time in more than a decade
Mon Feb 23, 2:27 AM ET
BEIJING (AFP) - China may raise local-currency interest rates for the first time in more than a decade as all other attempts to curb growth in consumer prices and investment have failed, according to economists.
Early signs of rising inflation may force China's policy makers to hike the deposit rate to make it more attractive to put money in the bank, resorting to a policy measure they have not tried their hand at since 1993.
"I expect the deposit rate will increase this year," said Wang Zhao, an economist with the Development Research Center, a think tank affiliated with the Cabinet. "When exactly depends on how the whole economy is operating."
China's economy expanded 9.1 percent last year, pulling much of Asia with it, and a decision to rein in growth could potentially have a devastating impact on the region.
Japan, which saw economic growth reach a 13-year high in the last quarter of 2003, can thank booming exports to China for much of the newly-won momentum.
But with consumer prices in China now rising at the fastest pace in nearly seven years, officials in Beijing may now try to do what neither SARS (news - web sites) nor the bird flu virus was capable of -- slowing down the Chinese growth engine.
The problem is too much money being too easily available and central bank governor Zhou Xiaochuan has said the government will give top priority to the job of preventing inflation from spinning out of control.
"The central bank will use various instruments to adjust credit growth," Zhou said according to the China Daily.
Warning signs of an investment bubble have emerged in recent months in industries such as real estate, steel and cement, pushing growth in fixed asset investments last year to 26.7 percent.
Efforts to tighten credit -- from raising commercial banks' reserve ratios to increasing down payment requirements for luxury housing -- have had little effect.
The M2 money supply expanded by 18.1 percent in January from a year earlier, only marginally below the 19.3 percent observed in the same month of 2003.
Therefore, it may make sense for China's monetary authorities to strike right at the core of the problem, by hiking interest rates from their current low level, economists have argued.
Interest rates are now so modest that it makes little sense to save rather than to spend on consumption or investment.
The benchmark one-year interest rate on deposits denominated in the yuan is currently 1.98 percent, which, combined with rising inflation, makes it a very unattractive option to put and keep money in the bank.
"People are losing out when they save their money in banks because of low interest rates," Yuan Guangming, an economist with the Chinese Academy of Social Sciences, told the China Daily.
Last year consumer prices rose 1.2 percent, meaning the real interest rate for one-year deposits was a mere 0.78 percent.
If deposit rates do not change, real interest rates could soon be heading below zero.
In both December and January, consumer prices rose 3.2 percent from a year earlier, marking the highest level since April 1997, and they could be about to rise even further.
China reported Monday that producer prices were up 3.5 percent in January from a year earlier.
This figure -- which shows prices of products as they leave the factory but before they enter the distribution system -- will eventually translate into higher prices for consumers, although with a time lag, economist said.
Although the consensus seems to be for higher interest rates in the coming months, this is not a panacea for the Chinese government, analysts said, warning new policies will bring new problems.
"If the government raises interest rates, more money will come into China, making monetary policies more difficult to handle," said Susan Qin, an economist with BNP Paribas Peregrine in Beijing. |
