China's consumer prices, repeating their July performance, climbed 5.3 percent year-on-year in August, putting more pressure on the central bank to raise Renminbi interest rates for the first time in nine years.

Higher food and public utility prices during the month kept the consumer price index (CPI) -- policy-makers' key inflation gauge -- at a relatively high level, said Qi Jingmei, an economist with the State Information Center (SIC).

Prices for public utilities such as water, electricity and fuel rose 9.6 percent year-on-year in August, according to the National Bureau of Statistics. Grain prices jumped 31.8 percent while egg prices increased 30.3 percent. Prices for fresh vegetables edged up 5.8 percent year-on-year.

Governor Zhou Xiaochuan said last week that the central bank would decide whether to raise the interest rate or to resort to other tightening measures after the National Bureau of Statistics released major economic figures in August.

The figures, however, are mixed. Growth in fixed asset investment and money supply slowed in August, but the industrial output growth picked up.

Niu Li, also a SIC economist, said the government should keep a close watch on prices, because the upward pressure is already great.

International oil prices rose as high as US$49 per barrel during the past few weeks.

"There are also signs that raw material prices may rebound," said Niu.

The rising CPI has already put consumer savings into negative interest rate territory, which can lower consumer expectations for the future. A recent survey by the People's Bank of China -- the central bank -- indicates that public satisfaction with current consumer prices is at its lowest level since 1999.

The negative interest rate also leads to a decline in bank deposits.

Many analysts and economists believe that the government should raise the Renminbi interest rate to increase consumer confidence.

Ba Shusong, a senior financial analyst from the State Council's Development Research Center, believes the time has come for China to make the move.??

"The detailed methods can cover many areas, for instance, adjusting interest rates to a certain level, giving the market a role in deciding the rates and continuing to expand interest rate fluctuation margins."

Meanwhile, Premier Wen Jiabao told a meeting of the State Council on Monday that the government should continue to control credit growth and the use of land for new projects strictly to prevent further economic overheating.

Growth in fixed asset investment and loans -- two key indicators that policy-makers have been watching for the impact of the cooling measures -- has been declining.

"It proves that our policies and measures are correct and effective," said Wen. "The policies should be stable."

M2, a major measurement of money supply and a key indicator of credit growth, grew 13.6 percent year-on-year by the end of August, the People's Bank of China announced Monday. This compares to 16.2 percent at the end of June and at the end of last year, and 15.3 percent in July.

Figures for August investment growth have yet to be officially released, but National Bureau of Statistics spokesman Yao Jingyuan was quoted by Reuters as saying that fixed asset investment grew 26.3 percent year-on-year. This compares with 31.1 percent in July and 28.6 percent for the first six months of the year.

Wen said that the essence of this round of macro-control is to adjust the economic structure and correct unhealthy systems and mechanisms. A combination of economic, legal and administrative measures is being used to solve these problems.

But the government did not implement the measures across the board; rather, it suppressed some sectors while supporting others, Wen said.

While controlling investment in some industries, the government actually increased its input into agriculture, considered a weak point at the moment. Steel, aluminum and cement are among the problem sectors that the government has named for excessive investment. Investment in these sectors has been strictly controlled.

"We should pay special attention to reforms that correct defects in the economic systems and mechanisms to consolidate the achievements of the macroeconomic control and adjustment," Wen said.

Tight control of land use and credit is key to controlling fixed asset investment, he asserted.

The State Council members called for the improvement of the land management system and the establishment of a clear responsibility system.

They also said money supply and credit growth should be kept within a reasonable range.

(China Daily, CRI.com September 14, 2004)