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Central Bank: Interest Rate Hike Possible
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China may further raise interest rates or bank reserve requirements to keep the macro economy stable, said central bank Governor Zhou Xiaochuan on Thursday.

 

"We do not rule out the continued use of interest rates, bank reserve requirements or other monetary tools to keep the stability of the macro economy," said Zhou at a press conference after the conclusion of the annual meeting of African Development Bank in Shanghai.

 

China has raised interest rates three times since last April and ordered banks to set aside more money as reserves seven times since last July. But the tightening policies have largely failed to prevent the economy from becoming overheated.

 

The gross domestic product grew 11.1 percent in the first quarter of the year, compared to last year at 10.7 percent, official statistics showed.

 

The growth of investment is also accelerating. In the first four months, urban fixed asset investment soared 25.5 percent, up from 25.3 percent in the first quarter, and 24.5 percent in 2006, the National Bureau of Statistics said Thursday.

 

Industrial output rose 17.4 percent in April after climbing 17.6 percent in March, the bureau said on Wednesday. Trade surplus ballooned 63 percent in April from a year ago to US$16.9 billion.

 

Bank lending was also strong. Banks extended 422 billion yuan in new loans in April, bringing the amount for the first four months to 1.85 trillion yuan - more than half the total for the whole of 2006.

 

In April, M2, the broad measure of money supply grew 17.1 percent, well above the central bank's full-year target of 16 percent.

 

Inflation, measured by the consumer price index, grew three percent in April, barely meeting the central bank's target, but hovering above the benchmark one-year deposit interest rate for the third straight month.

 

The negative interest rate is encouraging the Chinese to divert large amounts of bank savings into stocks.

 

Household deposits decreased by 167.4 billion yuan (US$21.7 billion) in April, compared with an increase of 60.6 billion yuan (US$7.9 billion) during the same time last year, the central bank said on Sunday. Analysts expect a substantial part of money may have flowed into the stock market.

 

A total of 4.79 million new A-share trading accounts were opened in April, more than the combined total for the previous two years, according to statistics from the China Securities Depository and Clearing Corporation.

 

The wave of new money has pushed the Shanghai and Shenzhen markets to a string of new highs, prompting worries about bubbles developing in the equity market.

 

Earlier this month, Zhou said bubbles building in the stock market were a concern.

 

Ha Jiming, chief economist of China International Capital Corporation, expects the central bank to raise the interest rate to pull the real interest rate out of negative territory as well as curb growth in money supply, inflation and asset prices.

 

His agency predicted two more interest rate increases this year, with the first happening before June and second in July or August.

 

(China Daily May 18, 2007)

 

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