Further interest rate hikes are looking increasingly likely as price indices continue to climb, a prominent economist said during the Boao Forum for Asia.
Justin Yifu Lin, a professor at Peking University, said in a speech that the central bank would this year make more use of interest rates as a tool to adjust investment and consumption.
The consumer price index (CPI) for March was up 3.3 percent year on year, driving the real interest rate into negative territory.
Lin said that of the 16 categories of goods in the CPI basket, four were going up and 12 were going down in 2003 and 2004. But this year, 10 have been moving north and just six have been in decline.
He said it remained imperative for the government to control high investment.
Fan Gang, a member of the Monetary Policy Committee of the People's Bank of China, offered his explanation for the high investment growth rate in the past few years.
Speaking at the same session, he said that State enterprises' rising profits, a distorted pricing system for natural resources and the absence of a dividend collecting mechanism were behind the growth.
Fan, who is also president of the National Economic Research Institute, acknowledged that State firms' productivity had increased over the past few years, and that this was part of the reason for their higher profits.
However, he said another reason was that while the cost of natural resources had increased significantly, State enterprises were exempt from paying royalties for using them or were granted a discounted price.
He said it was also interesting that the existing State enterprise management system was designed for firms that were in the red - a reflection of widespread loss making in the past.
Now, when firms make profits, they are not required to pay dividends to the State, leaving them awash with money, which they can use for new investment.
"We have to address this systematic defect," Fan said.
Responding to a question about the feasibility of encouraging Chinese firms to invest overseas to help resolve the problem of high foreign exchange reserves, Fan said that most enterprises were not yet mature enough to be able to invest in foreign countries.
In addition, "the whole world is coming to China to make things, so why do we need to go overseas?"
He said that China had to be very cautious in opening up its capital market.
"This issue is related to many sectors. We still have much to do in terms of legal structures and regulations.
"We must draw on the lessons of the Asian financial crisis that erupted a decade ago," Fan said.
(China Daily April 23, 2007)