A number of commercial banks predicted that China may raise the interest rate once or twice in the second half of this year. The first rate hike is expected by the end of this month.

Industry experts said they believe the government will likely impose other measures. For example, it may issue special treasury bonds and suspend or reduce the interest rate tax, alongside the interest rate rise.

The interest rate might rise once or twice by the end of this year and it will probably rise by the end of July as capital liquidity was high and the consumer price index (CPI) might have increased rapidly in June, China Merchants Bank said in a research report.

The central bank has slowed the pace of withdrawing currency from circulation so far in a move to leave room for the issuance of treasury bonds and another interest rate hike, the bank noted in the report.

The Bank of China (BOC) agreed with the predictions made by China Merchants Bank.

The People's Bank of China needs to increase the interest rate by at least 18-27 basis points, along with suspension of the interest rate tax, to bring the actual interest rate on savings into positive territory because CPI growth may reach 3.3 percent this year. This according to the central bank's predictions, because CPI could be much higher than the current interest rate for one-year savings, BOC noted.

BOC also pointed to rapid growth in bank lending and investment in fixed assets as signs of economic overheating.

Zhang Gang, an analyst from Southwest Securities, said the government might require financial institutes to raise interest rates for one-year savings and loans by 0.27 and 0.18 percentage points respectively, as it did in May.

But both Zhang and Gong Fangxiong, an executive of China research at JPMorgan Chase, believed that issuance of treasury bonds is more likely than the interest rate hike.

Gong explained the growth of bank loans and investment usually slows down in the second half of the year as commercial banks tend to grant more loans in the second half than in the first half. Substantial interest rate rises may therefore not be necessary in the second half and an interest rate hike may be not effective enough to reduce capital liquidity, Gong said.

China has raised the interest rates twice and bank reserve ratios five times so far this year.

(China Daily July 18 2007)