Wed, May 19, 2004 - Page 11 News List

China rate hike seen if CPI exceeds 5%


China may need to raise interest rates to curb investment if the consumer price index climbs above 5 percent, a central bank policy maker said.

"If consumer prices become uncontrollable, that is rising above the bearable limit of 5 percent, China may have to raise interest rates," Li Yang, a member of the central bank's monetary policy committee, said yesterday after a conference organized by CLSA Ltd in Qingdao.

The central bank is concerned that an inflation rate higher than the one-year lending rate, currently 5.31 percent, may exacerbate price increases by encouraging companies to borrow and to stockpile materials for profit. China's inflation accelerated to a seven-year high of 3.8 percent last month.

The central bank is trying to curb the money supply and credit growth to help cool runaway spending in industries such as steel, cement and real estate. China's investment in factories, roads and other fixed assets jumped 43 percent in the first quarter, straining raw materials supplies and stoking inflation.

"The consumer price index is likely to reach 4.5 percent in May and 5.8 percent in June," said Qu Hongbin, an economist at HSBC Holdings Plc in Hong Kong, in a research note today. "This means that China is likely to start to increase the managed lending rate before July."

Qu expects an increase of 50 basis points.

Li said China is unlikely to raise interest rates in the next six months unless inflation accelerates further, because an increase won't necessarily help to curb money supply. Li is also director general of the Institute of Finance & Banking, a think-tank under the Chinese Academy of Social Sciences.

M2, China's broadest measure of money supply, grew 19 percent from a year earlier in April, exceeding the central bank's target for a 16th straight month, the bank said on May 13.

"Unlike developed countries like the US, a rise in interest rates doesn't mean the money in circulation will drop," he said. "In China there isn't a close relation between interest rates and money supply."

The government is also reluctant to raise interest rates out of concern that a wider gap between yuan and dollar deposit rates would attract further overseas capital inflows, Li said.

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