Economists are looking to interest rate hikes to curb China's
excessive liquidity as banks were required to tighten credit from
Monday by keeping more money in reserve.
The central bank has ordered lenders to raise the deposit
reserve ratio by half a percentage point from Monday, which is
estimated to take 150 billion yuan (US$18.8 billion) out of the
banking pool.
The fourth reserve ratio hike in seven months, the move aimed to
soak up increasing currency liquidity generated by mounting trade
surplus and to consolidate macro-economic controls, said the
central bank.
However, an interest rate hike was inevitable, as reserve ratio
adjustments and open market operations had proved ineffective in
curbing excess liquidity, the southern China-based Information
Times on Monday quoted Wu Jinglian, a leading Chinese
economist, as saying.
Customs figures show the country's trade surplus last year
soared 74 percent to a record US$177.47 billion, almost 10 times
the value of the money frozen by each of the past reserve ratio
hikes.
Governor of the central bank Zhou Xiaochuan said last week the
bank had not ruled out the possibility of adopting other measures
to tighten money supply.
"Whether and how we continue to adjust the reserve ratio and
interest rates depend on the trend of economic development and the
effect of previous measures," said Li Chao, spokesman of the
central bank, at a press conference on Thursday.
The central bank has increased the deposit reserve ratio by two
percentage points to 9.5 percent since last July.
The previous three hikes froze 460 billion yuan last year, while
open market operations withdrew about 410 billion yuan from the
lenders.
The last interest rate hike was in last August, when the central
bank raised the one-year benchmark interest rate by 0.27 percentage
points.
The government has deemed it unnecessary to raise interest
rates, as the country's inflation remained low despite double-digit
economic growth.
The rise of the consumer price index (CPI) stood at 1.3 to 1.4
percent on average for each month of 2006 over the previous year.
It hit a 20-month high in November, reaching 1.9 percent, half a
percentage point up from October.
As the first quarter of a year usually saw a peak in bank
credit, which could lead to accelerating fixed-asset investment
growth and price rises, the central bank was expected to increase
interest rates, Wang Zehui, an analyst with the Guangdong Foretech
Investment Consultants Co., Ltd., told the Information
Times.
Global investment bank Lehman Brothers predicted last week a two
percent rise in the CPI in 2007, which would result in negative
actual interest rates for savers.
That would prompt the central bank to raise interest rates in
the second quarter, said Sun Mingchun, Asia economist of Lehman
Brothers, while the investment bank estimated the hike to be 27
basis points in a report.
The deposit interest rate ranges from 0.72 to 4.14 percent in
China, with the three-month deposit interest rate at 1.8
percent.
However, Peng Xingyun, director of the monetary theory and
policy division of the Chinese Academy of Social Sciences, said
interest rate hikes could only exacerbate money oversupply.
"A higher interest rate in China will draw in more hot money
from foreign speculators and force the central bank to throw more
Renminbi into the market in exchange for the inbound foreign
currency," said Peng.
(Xinhua News Agency January 16, 2007)
Banks Predict Rate Hike As Reserve Ratio Rises
Economists are looking to interest rate hikes to curb China's
excessive liquidity as banks were required to tighten credit from
Monday by keeping more money in reserve.
The central bank has ordered lenders to raise the deposit
reserve ratio by half a percentage point from Monday, which is
estimated to take 150 billion yuan (US$18.8 billion) out of the
banking pool.
The fourth reserve ratio hike in seven months, the move aimed to
soak up increasing currency liquidity generated by mounting trade
surplus and to consolidate macro-economic controls, said the
central bank.
However, an interest rate hike was inevitable, as reserve ratio
adjustments and open market operations had proved ineffective in
curbing excess liquidity, the southern China-based Information
Times on Monday quoted Wu Jinglian, a leading Chinese
economist, as saying.
Customs figures show the country's trade surplus last year
soared 74 percent to a record US$177.47 billion, almost 10 times
the value of the money frozen by each of the past reserve ratio
hikes.
Governor of the central bank Zhou Xiaochuan said last week the
bank had not ruled out the possibility of adopting other measures
to tighten money supply.
"Whether and how we continue to adjust the reserve ratio and
interest rates depend on the trend of economic development and the
effect of previous measures," said Li Chao, spokesman of the
central bank, at a press conference on Thursday.
The central bank has increased the deposit reserve ratio by two
percentage points to 9.5 percent since last July.
The previous three hikes froze 460 billion yuan last year, while
open market operations withdrew about 410 billion yuan from the
lenders.
The last interest rate hike was in last August, when the central
bank raised the one-year benchmark interest rate by 0.27 percentage
points.
The government has deemed it unnecessary to raise interest
rates, as the country's inflation remained low despite double-digit
economic growth.
The rise of the consumer price index (CPI) stood at 1.3 to 1.4
percent on average for each month of 2006 over the previous year.
It hit a 20-month high in November, reaching 1.9 percent, half a
percentage point up from October.
As the first quarter of a year usually saw a peak in bank
credit, which could lead to accelerating fixed-asset investment
growth and price rises, the central bank was expected to increase
interest rates, Wang Zehui, an analyst with the Guangdong Foretech
Investment Consultants Co., Ltd., told the Information
Times.
Global investment bank Lehman Brothers predicted last week a two
percent rise in the CPI in 2007, which would result in negative
actual interest rates for savers.
That would prompt the central bank to raise interest rates in
the second quarter, said Sun Mingchun, Asia economist of Lehman
Brothers, while the investment bank estimated the hike to be 27
basis points in a report.
The deposit interest rate ranges from 0.72 to 4.14 percent in
China, with the three-month deposit interest rate at 1.8
percent.
However, Peng Xingyun, director of the monetary theory and
policy division of the Chinese Academy of Social Sciences, said
interest rate hikes could only exacerbate money oversupply.
"A higher interest rate in China will draw in more hot money
from foreign speculators and force the central bank to throw more
Renminbi into the market in exchange for the inbound foreign
currency," said Peng.
(Xinhua News Agency January 16, 2007)