The central bank may raise interest rates at least twice in
2008, said both research reports by Bank of China (BOC) and China
International Capital Corp (CICC).
In a recent report, BOC said the People's Bank of China will
raise interest rates two or three times this year, making the
one-year term deposit rate from current 4.14 percent to between
4.68 and 4.95 percent.
After a 5 percent tax deduction on interest income, the one-year
fixed-term deposit rate should be between 4.45 and 4.7 percent. If
the consumer price index (CPI) grows around 4.5 percent this year
as expected, the rate hikes may turn the real interest rate from
negative to positive horizons, said the report.
BOC anticipates accelerated renminbi appreciation against the US
dollar this year. The appreciation is estimated to eventually be
around 8 to 10 percent.
The report said the key to solving the excessive liquidity
problem is to keep money from accumulating. However, relieving the
pressure quickly is not a possibility in 2008 because of the
mounting trade surplus and foreign direct investment (FDI) flooding
into China.
The combined trade surplus and FDI is likely to reach $330
billion in 2007 while that for this year could be a little lower,
at $300–$240 billion as trade surplus and $60 billion from FDI.
As a result, the central bank may hold as much as 2.1 trillion
yuan ($288 billion) funds outstanding in foreign exchange. It is
companies and residents that acquire capital through the funds
outstanding for foreign exchange. In order to absorb 2.1 trillion
yuan from the market, the country has to issue more treasury bonds.
As a result, higher returns are needed to attract more buyers,
which will drive interest rates higher, BOC said in the report.
CICC seems to agree with BOC in favor of at least two interest
rate hikes in 2008. However, it expects more dramatic inflation,
with CPI exceeding the widely anticipated 4 to 4.5 percent. It said
2008 CPI could reach 5 to 5.5 percent.
CICC also believes food prices are to maintain double-digit
growth in the first half this year. In the meantime, growth rate in
non-food prices could accelerate to over 2 percent.
The CICC report projected 6 to 7 percent growth rate in CPI in
the first half, with monthly growth of 7 percent at the highest. In
the second half, CPI may grow at lower speeds at between 3 and 4
percent. The difference between year-on-year monthly CPI growth may
not be as big as in 2007.
The main drivers for 2007 CPI have proven to be prices in meat
and poultry, egg and edible oil. CICC believed in the first half
this year, prices of the three food categories are not likely to
fall quickly. On the contrary, they are likely to climb higher and
corn and rice prices may become a new force pushing up CPI
figures.
The report said the 4.68 percent nominal interest rate after a
few hikes in 2008 may not cover the 5.5 percent CPI growth, which
means the real interest rate is still negative for the first half.
In the second half, however, when the CPI growth falls down to 3 to
4 percent, the real interest rate could reach 1 percent. CICC said
central bank interest rate hikes will be more frequent in the first
half than in the second.
(China Daily January 11, 2008)
