At a seminar held here recently on the opening up of the financial sector and reform of commercial banks, Wu said that however, if the inflation rate keeps on going up, leading to an actual negative lending rate, the central bank would consider raising lending interest rates from the current 5.3 percent.

Since last September, China's Consumer Price Index (CPI) has increased rapidly year-on-year. In the first quarter of this year, the year-on-year CPI growth was 3.2 percent for January, 2.1 percent for February and 3.1 percent for March. The rapid growth of CPI caused conjecture from the market that the central bank might raise interest rates.

The central bank will follow the CPI movement closely, said Wu." If the CPI growth caused a negative lending rate, which enables corporations to make money even after they pay back the principle and interests, the central bank will consider raising interest rates."

"A negative lending rate will enable corporations to store raw materials, and thus drive the inflation rate further up," said Wu." It will also block capital from flowing into the production sector from the circulation sector."

Wu also said that the central bank will consider another factor when deciding whether or not to readjust interest rates.

China still implements rigid foreign exchange controls, which means the central bank will buy excess forex flowing into the country, raising the nation's forex reserves while releasing more base money into the market.

Owing to big gap of interest rates between Renminbi and US dollar deposits, the money supply of Renminbi increased rapidly inthe past two years. Statistics show that the one-year deposit rates for Renminbi stands at 1.98 percent while that for the US dollar stands at 0.5625 percent.

If the situation continues to develop, the central bank will have to raise interest rates to keep the money supply at a reasonable level, Wu said.

According to Wu, the central bank's current job priority is notto raise interest rates, but to reform the interest rate mechanism.

The central bank has adopted two major reform measures this year. One is to adopt a floating interest rate for reloans, a substantial step forward for the market-driven interest rates mechanism.

Secondly, the central bank reformed the method of loan rates settlement. Previously, interest rates for mid- and long-term loans were set each year. Currently, the rates could be set monthly, quarterly or yearly, according to the negotiation between the creditors and the debtors.

Wu also encouraged commercial banks to develop financial derivation products to provide risk-prevention tools to their customers in the time of market-driven interest rates mechanism.
 
(Xinhua News Agency April 21, 2004)