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Rate-hike speculation swirls through nation
By Chen Yao (Business Weekly)
Updated: 2004-06-23 15:00
Despite the central bank's warning last week that
changes to China's interest rate regime will hinge upon further reports of
economic data, investors are continuing to speculate on the timing and impact of
a rate hike.
At least, there are signs China has
managed to regain control over its overheated sectors, and any mild rate rise in
the near future must be the government's last measure in its efforts to ensure
the rocketing economy lands softly, economists said.
"A soft landing is far from certain, despite positive signs
the authorities' attempts to cool off the economy have started to work,'' Peng
Longyun, a senior economist with the Asian Development Bank's Beijing office,
told China Business Weekly.
Two sets of figures --
one released last week and the other earlier this month -- indicate growth of
China's industry output and fixed-asset investment slowed in May, even though
domestic inflation increased.
The output of China's
industries grew 17.5 per cent, year-on-year, last month, which was slower than
the 19.1-per-cent growth in April, indicate figures released by the National
Bureau of Statistics (NBS).
Investments in fixed
assets -- including infrastructure projects, metal processing plants and
automobile factories -- expanded at an annual, 18.3-per-cent pace in May. That
was down from the sky-high, 34.7-per-cent recorded in April, NBS reported last
week.
However, consumer prices, the inflation
barometer, rose to a seven-year high of 4.4 per cent in May. That revived
speculation the People's Bank of China (PBOC), the nation's central bank, will
soon raise interest rates.
"The interest rate is the
central bank's last weapon, held in reserve, to combat inflation. But,
unfortunately, it is a two-edged sword ,'' Peng said.
Mild rise may help pilot soft landing
Although interest rate hikes may lower soaring consumer
prices, such action could dampen investment in sluggish sectors, and, as a
result, cause an immediate shrinkage of liquidity for fund-demanding industries
such as real estate, he added.
"Inflation is rising.
But it hasn't grown into much of a threat for China's economy, because the
meagre 4 per cent is nothing compared with the inflationary rate in excess of 10
per cent in the early 1990s,'' Peng said.
"My view
is China has not yet walked out of the shadow of deflation, which began plaguing
the country during the 1997 Asian financial crisis.''
Recent surges in domestic price levels are just a "sign of
recovery'' from relatively low prices over the past six years, and they don't
necessarily reflect uncontrollable inflation, NBS said in its report.
Mu Huaipeng, director of the central bank's research
division, last week said the bank's decision to raise rates will depend on
macroeconomic statistics of at least three months, beginning from June.
Earlier, the central bank's governor, Zhou Xiaochuan, said
"bank rates should keep pace with prices.''
That was
widely interpreted by State media that there would be an interest rate hike in
the immediate future.
The Economic Observer
newspaper reported on June 13, citing an unnamed PBOC source, the central bank
may initially raise the lending rate by 0.5 percentage point and the deposit
rate by 0.25 percentage point.
"A mild rate hike, as
a tentative measure, might be introduced soon. But, because it would be small,
it would not likely have much impact on the economy,'' Yi Xianrong, an economist
with the Chinese Academy of Social Sciences' Institute of Financial Research,
said.
Although the central bank is attempting to use
the interest rates to control credit in the system, small rate rises are
unlikely to dampen investors' enthusiasm for borrowing from banks to finance
their investments in the real estate and automobile sectors.
Those two sectors, in recent years, have generated
exceptional returns, Yi said.
"Can a 0.5-per-cent
rise in banks' lending rates scare off borrowers, especially those who expect to
gain annual returns in excess of 20 per cent? Absolutely not,'' he said.
"Prudent regulations in certain overheated sectors,
synchronized with administrative measures, might work more effectively than
interest rate rises. Although, in the long run, the changes in interest rates
should be prioritized in macroeconomic adjustments.''
China's financial authorities, to make interest rates an
effective tool of monetary policy, must liberalize the interest rate regime by
first widening the floating range of rates, Yi said.
"Otherwise, the lending mechanism of the banking sector
will be distorted,'' he said.
Even though the
combined deposits in China's commercial lenders exceeded combined loans by 5
trillion yuan (US$603.8 billion) last year, many enterprises, especially those
from the private sector, still cannot access bank loans, he noted.
If PBOC raises interest rates, the bank will probably do it
at the beginning of July, around the time the US Federal Reserve (Fed) is
expected to raise its rates by a quarter of a percentage point. The Fed is
scheduled to meet June 29-30.
"The tightening of US
monetary policy will give PBOC much leeway to adjust its interest rates,'' Zhang
Bin, a financial researcher with the Institute of World Economics and Politics
under the Chinese Academy of Social Sciences, told China Business Weekly.
Because the renminbi is virtually pegged to the US dollar,
analysts expect both currencies will be adjusted in the same direction,
especially given both nations' immediate need to fight off inflationary
pressure, he said.
"Authorities' earlier concerns
that domestic interest rate hikes may result in greater pressure to revalue the
renminbi will be for naught if the United States raises its interest rates
first,'' he added.
Speculation of higher bank rates
has weighed on China's domestic share prices, and caused investors to retreat
from the market.
China Securities Regulatory
Commission statistics, released last week, indicate transactions in the Shanghai
and Shenzhen bourses fell 65.5 per cent, from April's peak, in May.
As a result, 106.2 billion yuan (US$12.8 billion) in market
capitalization for A and B shares evapourated in May amid concerns of a
near-term interest rate hike.
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