China should raise interest rates as inflation kicks in
- By Chris Leung
0 Comment(s)
Print
E-mail Shanghai Daily, March 18, 2013
Finally, quantitative easing programs conducted by other central banks around the world increase the risk of capital inflows and a resultant boost in money supply.
Funds outstanding for foreign exchange at financial institutions increased by 683.7 billion yuan (US$108.5 billion) in January, even more than the whole of last year's 494.6 billion yuan, threatening to drive up inflationary risks. More importantly, this is the part of money supply that the central bank has little control over.
Even the domestic portion of money supply is increasingly difficult to be controlled as the growth of total social financing has quickened over the past year. Financial instruments such as trust loans and corporate bond financing saw much faster rates of growth than conventional yuan bank loans. That explains the constant worry over the proliferations of China's wealth management products. Real rates are too low, forcing liquidity everywhere for yields regardless of risks.
It is heartening to see that authorities have accounted for these inflation forces when formulating monetary policy. First, the central bank neither cut the reserve requirement ratio nor interest rates even at a time when the CPI was decelerating. Second, the central bank has increasingly used repo operations to control liquidity in the banking system. Third, the government has reiterated that administrative controls on the property market will remain. Authorities know well the considerable impact on property prices if the reins are cut loose.
Keeping vigilance
That explains why administrative controls on the property market will likely remain in place in spite of completion of leadership transition. Finally, the central bank has acknowledged in its latest Monetary Policy Report that "due to different factors, demand and supply curves will probably become steeper, making prices more sensitive to demand expansion," reflecting its vigilance against inflation over the longer run.
The medium-term outlook on China's interest rate trend is clear.
The central bank can either choose to raise benchmark rates or achieve the same result by deepening interest rate liberalization. Pursuing the latter route would be more consistent with China's desires to internationalize the yuan, which implies fewer controls over the capital account and the need for interest rates to be market-determined.
Go to Forum >>0 Comment(s)