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Experts Hold Mixed Views over Interest Rate Hike

Debate over whether China should raise its interest rate or not is continuing, as the central government persists with its wait-and-see stance.

Some experts say China needs to and has the opportunity to raise the renminbi interest rate while others say the time is not right.

Wang Zhao, a researcher with the State Council's Development Research Center, said it was necessary for the government to increase the rate marginally, due to further consumer price rises in May.

The consumer price index (CPI), policy-makers' key inflation gauge, rose a year-on-year 4.4 percent in May, up from a 3.8 percent rise in April and a 3 percent hike in March, according to figures from the National Bureau of Statistics.

An increase in the interest rate will send a signal to the public that the government is willing to use more market measures to keep economic development on track, he said.

"Market measures are beneficial for fostering competition," Wang said. "The government should avoid an overuse of administrative means."

He said the present over-investment is mainly due to the low cost of bank loans.

The government should raise the interest rate to curb investment.

"The time is right to raise the interest rate," Wang said.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the government needed to act with urgency.

"Chinese residents have been suffering under a negative interest rate for months," he said.

The benchmark one-year bank deposit rate is 1.98 percent.

The negative interest rate lead to a decline in residents' bank deposits, Yuan said.

"This pushes down their purchasing power," he said. "The negative interest rate also results in people's lower expectations for the future."

The government should pay more attention to the interests of ordinary people, which were above State-owned companies and banks.

Yuan said a lower interest rate could help reduce the reform costs for State-owned companies and banks.

In a recent survey by the central People's Bank of China, about 25 percent of urban depositors - which is 10.8 percentage points higher than a year ago - said they cannot bear the present high consumer prices.

About 40 percent of the depositors believe that consumer prices will rise further in the third quarter.

Some 73 percent of the urban depositors, an increase of 2.2 percentage points from a year earlier, said that the interest rate was too low.

Less urbanites like saving their money in banks.

According to the survey, 15 percent of the residents, an increase of 3 percentage points from a year ago, plan to withdraw their savings deposits to buy treasury bonds, and 10.6 percent want to buy stocks or funds with their deposits.

People's Bank of China Governor Zhou Xiaochuan said last week that the central bank would closely monitor the economic and financial operations of the country.

It will try to bring into full play the role of monetary and credit policies in promoting economic restructuring and change the mode of economic growth, he said.

In April, Vice-Governor Wu Xiaoling said if the inflation rate keeps rising, leading to a negative lending rate, the central bank "would not sit idle."

A negative lending rate would enable corporations to store raw materials, driving the inflation rate up even further, she said.

Mu Huaipeng, director of the central bank's research bureau, says the government needs to observe the June, July and August price changes before making a decision.

"It is difficult to say whether consumer prices will continue to rise in the coming months," Mu said.

Zhang Xueying, a senior economist at the State Information Centre, said the central bank was unlikely to raise the rate in July or August.

"Major economic figures suggest the country's macro-control measures have taken effects," he said.

Fixed asset investment rose a year-on-year 18.3 percent in May. The growth rate was 16.4 percentage points lower than that in April.

The CPI, although it rose 4.4 percent in May compared with a year ago, dropped 0.1 percent compared with April.

"The central bank will not merely look at the CPI figures on a year-on-year basis, it will also look at the figures on a monthly basis," Zhang said.

If the central bank raises the interest rate, investment growth will slow further, he said.

Meanwhile, the grain price - a major reason for the CPI rise - will stabilize due to a good summer harvest, increased exports and expanded plantation areas of autumn grain.

"The CPI will turn," Zhang said.

Qi Jingmei, another economist at the State Information Centre, said there was no real significance in raising the renminbi interest rate.

"The increased macro-control measures will cool the economy," she said.

The government is also unwilling to raise the interest rate, because it fears a higher rate would attract more foreign capital, increasing the pressure for the renminbi's appreciation, she said.

Bank of China's spokesman Zhu Min said he did not believe that China would raise its interest rate earlier than the possible rate rise in the United States.

"Exchange-rate pressure is more important than interest rates," he said.

Li Yang, a member of the central bank's monetary policy committee, said the government should postpone an interest rate decision because consumer prices may start to fall soon.

A rate increase could contribute to a resurgence of inflation by attracting further speculative capital inflows, which would push up the money supply.

The central bank bought US$36 billion of foreign currency in the first quarter even though the nation recorded a trade deficit, a sure sign that speculation is huge, Li said.

The government should fine-tune a certain type of rate, rather than raising overall rates, should it decide on an increase, Li said.

According to the National Bureau of Statistics, the government is capable of avoiding severe economic inflation.

The present higher prices are partly due to supply bottlenecks in some sectors.

The fast fixed asset investment growth since the second half of last year has resulted in price rises for products such as steel, non-ferrous metals, coal, electricity and oil.

A fall in grain production, down 5.8 percent last year, has resulted in a rapid price rise since October. The grain price rose by 25.6 percent year-on-year during the first five months, the bureau said.

The bird flu outbreak in the first quarter also led to price rises for meat, chicken and eggs.

Food price rises alone contributed 2.88 percentage points to the CPI, the bureau said.

However, preventing market price hikes remains a priority task for China, the bureau said.

(China Daily June 21, 2004)

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