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Wed, May 03, 2006 - Page 10 News List

China should raise interest rates: IMF

ASIAN FOCUS The fund's latest 84-page regional report forecasts 7 percent economic growth in the region, but warned concerns about future oil supplies could cause woes


China should continue to raise interest rates, an IMF official said yesterday, just days after Beijing announced a rate hike to keep its economy from overheating.

"China needs to continue to tighten monetary conditions," Wanda Tseng, deputy director of the IMF's Asian Department, told reporters at a briefing.

"There is a need clearly for additional measures," Tseng said.

Her remarks came as the IMF said in its 2006 Regional Economic Outlook that growth in Asia is expected to remain robust this year at 7 percent, the same as last year.

However, the region could be threatened by high oil prices, tighter financial markets and bird flu, the Washington-based IMF said.

The IMF forecast China's economy to expand 9.5 percent this year compared to 9.9 percent last year.

In an attempt to cool its sizzling economy, China's central bank last week raised the benchmark one-year lending rate 27 basis points to 5.85 percent, the first interest rate increase since October 2004, when the central bank raised that rate the same amount.

Tseng described the rate increase as an "appropriate move."

"There's a lot of liquidity in the banking system and liquidity can fuel a rise in lending," she said. "In the past, the banks have been restrained from lending because they were going through restructuring after being recapitalized by the government, but I think those forces may be waning going forward."

She said in this environment, China raising rates further would be "the more prudent thing to do."

Tseng also reiterated that greater flexibility in the Chinese currency, the yuan, is warranted.

In its 84-page regional report, the IMF said Asia's growth will be boosted by the continuing recovery in Japan, where domestic demand is strengthening, corporate investment remains robust and the labor market is still firm. The IMF forecast Japan's economy to grow 2.8 percent this year, slightly stronger than last year's 2.7 percent.

Economies are benefiting from surging demand for the region's products, especially electronics, and this should continue, the IMF said.

"While domestic demand had long been tepid -- China and India excepted -- it has been gaining traction since early 2005," the forecast said.

India's economy was expected to grow by 7.3 percent from last year's 8 percent.

So far, rising oil prices have had a moderate effect on Asia's growth, the IMF said. But this could change as concerns about future supplies grow, it added.

The report also warned that the region's booming stock markets could decline if "foreign investors were to pull back amid a rise in global risk aversion."

The IMF said that bird flu had the potential to be the most devastating risk. But it added the impact of an outbreak would depend on how well the region has prepared for it. So far, the contingency plans are largely untested, it said.

Policy-makers are facing several macroeconomic challenges, the IMF said. Central banks have to deal with inflationary pressures caused by surging oil prices, it said. But while doing this, they have to avoid hurting improving domestic demand.

Another challenge is reducing debts while finding a way to upgrade public infrastructure and meet the costs of aging populations, the IMF said.

Also, the reported noted that corporations are becoming more reluctant to invest in Asia "as export and output volatility have increased with the region's shift in production toward advanced industries such as electronics."

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