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)