Tags: China | Raise | Rates | Inflation

Economists: China Will ‘Inevitably’ Raise Rates in Battle Against Inflation

Friday, 19 November 2010 11:18 AM

China’s reserve-ratio increases for banks and threats of price controls on essential goods are likely to prove insufficient to tame inflation, and the central bank will have to raise interest rates further, economists said.

The People’s Bank of China ordered a 50 basis point increase in the amount of money that lenders must set aside, two days after the cabinet announced measures to tackle inflation. A basis point is 0.01 percentage point.

Stocks and oil fell on the central bank announcement, highlighting concern that Chinese efforts to cool the nation’s fastest rise in consumer prices in two years may cause growth to falter. Analysts at nine banks surveyed this week by Bloomberg News predicted the central bank will add to last month’s rate rise, the first since 2007, by year-end.

“Monetary policy is being tightened, as it should be, and a rate hike will follow sooner rather than later,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank. The next move “inevitably” will be on rates, Shen said.

China’s benchmark stock index has had its biggest two-week sell-off since May amid concern that monetary tightening will hamper spending in the fastest-growing major economy. The Standard & Poor’s 500 Index and the MSCI World Index slipped after the announcement. The Shanghai Composite Index earlier closed 0.8 percent higher, paring its weekly decline to 3.2 percent.

Wen’s Meeting

Concern that rising consumer prices will undermine the economy spurred Premier Wen Jiabao to hold a cabinet meeting on the issue this week. The measures contemplated by the State Council range from a crackdown on speculation in agricultural goods to the imposition of price caps on “daily necessities” if needed.

The meeting came amid concern at the threat increased food costs pose to the poorest people in the world’s most populous nation. More than 81 million people in disaster-affected areas may need food assistance from the government this winter, the Ministry of Civil Affairs said on its website on Nov. 18.

At Societe Generale, Hong Kong-based economist Yao Wei said this week that China’s “old-fashioned price stabilization policies” will not be enough to reduce the case for monetary tightening. The possibility of “more interest-rate hikes by the year-end remains relatively high,” she said.

Controlling Lending

The increase in banks’ reserve requirements, effective Nov. 29, was the second announced in two weeks. The aim is to step up liquidity management and “appropriately control” credit and loans, the central bank said on its website.

China’s inflation rate reached 4.4 percent in October, exceeding economists’ forecasts. Standard Chartered Plc analysts yesterday lifted their projection for the consumer price index for next year to an average of 5.5 percent, from about 3.2 percent for 2010.

While vegetable costs have helped to drive Chinese inflation higher this year, officials need to use tools such as interest rates to “prevent food inflation from spreading to the general economy,” Wang Tao, a Beijing-based economist for UBS AG. said yesterday.

Inflows of money from the trade surplus, foreign direct investment, and investors betting on gains by the yuan threaten to propel consumer prices after unprecedented lending by banks flooded the economy with cash from late 2008.

Rents, Wage Costs

Standard Chartered, HSBC Holdings Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Mizuho, Royal Bank of Canada, UBS, and Australia and New Zealand Banking Group Ltd. predict that the central bank will add this year to the quarter-point increases that took the benchmark one-year lending rate to 5.56 percent and the one-year deposit rate to 2.5 percent.

“Inflation is showing up in food most obviously, but also in rents, service sector wages, and non-food commodities,” analysts including Stephen Green, head of research for Greater China at Standard Chartered, wrote in a report yesterday. The bank anticipates a rate increase by Dec. 31 and three more by June 30.

Across Asia, China’s inflation compares with deflation in Japan and, at the other extreme, a 9.8 percent rate in India. In the U.S., consumer prices rose 1.2 percent last month from a year earlier.

Besides possible price caps, the State Council’s plans to rein in prices include selling state food reserves.

“Price intervention could be counter-productive because it may cause panic and worsen inflation expectations,” said Liu Li-Gang, a Hong Kong-based economist at ANZ who previously worked at the Hong Kong Monetary Authority and World Bank.

Excess liquidity is the “root of the problem” in China, Tao Dong, a Credit Suisse Group AG economist in Hong Kong said this week.

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China s reserve-ratio increases for banks and threats of price controls on essential goods are likely to prove insufficient to tame inflation, and the central bank will have to raise interest rates further, economists said.The People s Bank of China ordered a 50 basis point...
Friday, 19 November 2010 11:18 AM
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