Reply #29: China Rate hikes around the corner [View All]

[Ghost Dog]

China could raise interest rates after the release of the second-quarter economic data in mid-July, economists said, if statistics show inflation rising strongly despite Sunday's move to mop up liquidity.

The People's Bank of China, the central bank, hiked the reserve requirement ratio (RRR), or money commercial banks must keep as reserves, by 50 basis points, effective from May 10. It was the third such hike this year, with rural credit cooperatives and village and small township banks being exempt from the adjustment.

"The move aims to tighten liquidity," said Song Guoqing, senior economist with Peking University's National School of Development. "Liquidity pressure has been accumulating since the second half of last year," he said.

China's stunning 9.6 trillion yuan ($1.4 trillion) new yuan loans last year - in almost double that of 2008 - is believed to have not only turned around the country's economic growth momentum from the fallout of the global financial crisis, but also pushed up asset prices and consumer inflation.

The consumer price index (CPI), a main gauge of inflation, reached 2.2 percent in the first quarter of this year, compared with the 2.25 percent interest rate for benchmark one-year bank savings.

"Although CPI inflation remains modest on both year-on-year and sequential terms for now, producer and property prices have been increasing very quickly already and we believe it is just a matter of time before the CPI inflation rises to higher levels," Goldman Sachs economists said in a report.

Top research teams from Peking University and Tsinghua University forecast inflation could be well above 3 percent in the second quarter, effectively driving real interest rates into negative territory.

If that happens, interest rate hikes would be inevitable, possibly before mid-July, when the National Bureau of Statistics is scheduled to release the data, analysts said.

/... http://english.people.com.cn/90001/90778/90862/6971909.html