Thu, Sep 23, 2004 - Page 10 News List

ADB says China should raise rates to cool economy

LOAN PROBLEM The bank said that negative real interest rates are bad for the economy and also send the wrong signal to borrowers


China should raise interest rates to cool the economy and prevent a future buildup of bad loans in the banking system, the Asian Development Bank's (ADB) Bei-jing representative Bruce Murray said.

China's inflation, at 5.3 percent, is too close the benchmark one-year lending rate of 5.31 percent, encouraging companies and individuals to take out loans that they may not be able to repay, Murray said at a press conference in Beijing.

China's government has avoided raising rates for the first time in nine years, instead relying on lending and investment restrictions as it tries to slow growth in the world's seventh-largest economy to 7 percent this year from 9.1 percent last year.


"On balance we believe that negative real interest rates are bad for the economy and they send the wrong signal to borrowers," Murray said.

"This will cause an increase in non-performing loans," he said.

The Manila-based bank raised its forecast for China's economic growth this year to 8.8 percent, from 8.3 percent predicted earlier this year.

It said growth may slow to 8 percent next year, less than the 8.2 percent forecast earlier.

"The ADB feels China will succeed in cooling down its economy and that the economy will achieve a soft landing," Murray said.


Separately, the ADB said yesterday that Asia's economic growth is expected to hit a higher-than-expected 7 percent this year, thanks to stronger exports from developing nations, an economic recovery in major industrialized countries and buoyant intraregional trade.

"The region's growth will equal that of 2000, which was the fastest after the Asian crisis" in 1997, the bank said in an update of its annual Asian Development Outlook, which had forecast 6.8 percent growth this year.

Exports are expected to expand by 18.1 percent, up from its earlier estimate of 12.4 percent, the bank said.

Imports, however, are expected to increase by 20.8 percent, up from an earlier estimate of 14.8 percent, as a result of higher oil prices.

Aside from external trade, a marked recovery in fixed investments, especially in Hong Kong, Malaysia, Singapore and Taiwan, and a modest recovery in South Korea, Indonesia and the Philippines underpinned the region's strong economic performance in the first half of this year, the bank said.


The bank lowered its growth forecast for next year from 6.7 percent to 6.2 percent, largely due to "more subdued growth" for larger economies in the region, notably India, South Korea and Taiwan, plus "somewhat slower growth" for China

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