China should raise interest rates to curb the fastest inflation in 11 years and rein in stock and property prices, said Justin Lin Yifu, the World Bank's next chief economist.

"If the central bank doesn't raise interest rates, real deposit rates will be negative," Lin told reporters in Beijing yesterday. "I advocate China keeping interest rates flexible to keep real rates positive and to control asset prices."

China has kept rates on hold this year after six increases in 2007 as the central bank assesses the impact of snowstorms in January, weakening United States export demand and a declining stock market. Inflation has reached 7.1 percent while the CSI 300 Index of stocks, after retreating 13 percent this year, has still more than doubled since the start of 2007.

"The central bank may need to raise rates as soon as this month because inflation may have been even higher in February because of the disruptions from snowstorms," said Xing Ziqiang, an economist at China International Capital Corp in Beijing. Deposit rates may rise more than lending rates, said Xing, who expects February's inflation rate to be 8.5 percent.

China's key lending and deposit rates are at nine-year highs of 7.47 percent and 4.14 percent. The most recent increase took effect on December 21, said Bloomberg News.

Inflation higher than deposit rates makes it harder for the government to rein in asset prices, as people switch money from bank accounts to stocks and property.

The CSI 300 Index, the benchmark gauge of Chinese companies traded in Shanghai and Shenzhen is valued at 41.09 times earnings. Real estate prices in 70 major cities rose 10.5 percent in December from a year earlier, the fastest increase since at least 2005, when records began.

The economy is awash with money because of record trade surpluses caused by the nation's role as the world's assembling and manufacturing hub.

China contributed 20 percent of global growth last year, more than any other nation, according to International Monetary Fund estimates. The IMF expects the world economy to expand 4.1 percent this year, down from 4.9 percent in 2007, on tighter credit and the housing slump that's undermining US growth.

Lin, the author of more than a dozen books and a member of the National People's Congress (NPC), the nation's legislative body, is due to take up the World Bank role on May 31, replacing Francois Bourguignon, who stepped down after four years in the job. Lin is also head of the China Center for Economic Research at Peking University.

(Shanghai Daily March 5, 2008)