Although growth of China's consumer price index (CPI) slowed down in October and is expected to slip further in coming months, economists say price pressure still exists and the CPI is likely to stay at a relatively high level next year.

And with such pressure, it is possible that China will raise the renminbi interest rate further. However, a majority of the economists say this would not occur before the end of this year.

China's CPI growth jumped from 3.2 percent in January to 5.2 percent in September, before it finally slowed to 4.3 percent year-on-year in October.

"But the price pressures are still there," said Zhuang Jian, a senior economist with the Asian Development Bank.

The rising prices for energy and raw materials would continue to propel producer prices of industrial products, Zhuang said.

Higher producer prices and an increasing price pressure from public utilities such as water and electricity would have an impact on the future consumer price index (CPI), policy makers' key inflation gauge, he said.

"China's CPI is expected to rebound in the first half of next year," he said. "This will increase the likelihood of a new rate hike."

However, Zhuang said the government is unlikely to raise the rate before the end of this year, now that the country's CPI has begun to drop.

"October's CPI is within our expectations," Zhuang said. "It also reflects the accurate judgment of the National Bureau of Statistics, which believes the CPI will drop following the bumper grain harvest this year."

The trend of decline will continue in the rest of this year, he said.

The grain price, a major reason for the present higher CPI, will not rise very much, due to the bumper harvest and the government's attention.

Prices for public utilities such as water and electricity are also unlikely to rise, because the government wants residents to have a happy new year holiday, he said.

A recent decline in oil prices on the international market will alleviate the price pressures from abroad, Zhuang said.

Higher producer prices are also unlikely to transform into consumer price rises before the end of this year, he said.

Decreased price pressure and the government's increasing concern that more hot money might flow into China in expectation of the renminbi appreciation reduced the possibility of a new rate hike before the end of this year, he said.

Qi Jingmei, a senior economist at the State Information Center, said he agreed the government would not raise the interest rate in the short term, because of the decline of CPI in October.

"The CPI has dropped, the interest rate was raised... the central bank would not raise the interest rate further," she said.

The CPI would continue to drop further to about 4 percent in the next few months, Qi said.

According to the National Development and Reform Commission, the bumper grain harvest would play an important role in stabilizing the consumer prices.

Along with the implementation of the central government's macro-control measures, unstable and unhealthy factors existing in economic life would continue to be reduced or restricted gradually, it said.

Qi said if the CPI rose less than 4.5 percent in November and December, the central bank would not raise the interest rate.

"The government needs to further observe the results of the recent interest rate hike and the changes in other macro-economic figures such as industrial output and fixed asset investment," she said.

The central government raised the interest rate on October 29, the first time in nearly a decade.

It raised the benchmark rate on one-year deposits to 2.25 percent from 1.98 percent.

"The significance of (the rate rise) is more symbolic than actual," Qi said.

It sent a signal to the public that the central bank might further raise the interest rate, she said.

But even for the small interest rate changes, Chinese residents reacted strongly to it, Qi said.

Figures from the People's Bank of China indicate that new savings deposits in October reached 54.2 billion yuan (US$6.5 billion), the first time in nine months that the new deposits increased compared with the same month last year.  

Other economic figures are also moving in the direction which the government officials expect.

Growth in industrial output grew a year-on-year 15.7 percent in October, dropping from 16.1 percent in September.

Fixed asset investment growth declined to 29.5 percent during the first 10 months, from 29.9 percent during the first nine months.

Next year, it is almost certain the central bank will raise the interest rate.

The CPI is expected to stay at a high level of between 3.5 percent and 4 percent next year, Qi said.

Worldwide rate hikes would also encourage the central bank to make further decisions, she said.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the government should continue to raise the interest rate, because residents are still suffering a negative rate.

The negative rate would result in a shrinking of residents' wealth, he said. "This would have an impact on ordinary people's life."

It would also encourage residents to invest in real estate, the sector in which some bubbles are being felt.

The negative interest rate also encouraged companies to use loans to buy and store up raw materials to make profits, Yuan said.

Real estate developers would increase investment because of the low capital cost, he said.

Chen Jijun, a senior analyst with the Beijing-based CITIC Securities, said the government needs to raise the interest rate further to suppress the overall demand, because the CPI continued to stay at a higher level.

The impact of the macro-control measures has also begun to decline, he said.

Although growth in industrial output and fixed asset investment slowed in October, it was still at a fast pace.

Investment in real estate, which grew a year-on-year 28.9 percent during the first 10 months, has shown signs of rebounding.

But Wang Zhao, a senior researcher with the State Council Development Research Center, said a rate hike should be coordinated with the relaxation of present macro-control measures, if there are any.

Presently, administrative measures might be overused, he said.

A fast decline in loans and fixed asset investment would have a negative impact on economic development.

The administrative measures are only effective for political-oriented projects such as local governments' image projects.

For projects such as cars and real estate, market measures are more effective, he said.

"If the government gives up administrative measures and prices rise, the central bank could raise the interest rate," he said.

(China Daily November 29, 2004)