China’s central bank will probably have to raise interest rates in coming months as the three movements from mid-October leave household wealth being eroded by rising inflation.
The People’s Bank of China yesterday raised the rate of one-year loans by a quarter percentage point to 6.06 percent and the rate of one-year deposit an amount equal to 3 percent. The deposit rate remains nearly 2 percentage points less than the rate of consumer price increases, which savers an incentive to purchase goods and assets.
“There is still a substantial amount of hard work to do in terms of rates – at this stage of the cycle, the fact that we still have negative real rates is very alarming,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong and a former adviser to the government of Australia.
government of Prime Minister Wen Jiabao has yet to return the fees to the levels before the crisis, trying to keep the economic recovery to a growth of around 10 percent. With the danger of overheating in the first half of the year, policy makers tend to raise their benchmark indices, the banks to allocate more money to the reserves and let the yuan rise to curb price pressures, Wang Qing, an economist at Morgan Stanley in Hong Kong, wrote in a note yesterday.
Yuan rises
Interest rate swaps rose. The Shanghai Composite Index of shares fell 0.9 percent. The yuan closed unchanged at 6.5938 per dollar in Shanghai, after advancing as much as 0.2 percent.
“The economy has been growing too fast” and political leaders are “behind the curve,” said Andy Xie, an independent economist who previously worked for Morgan Stanley, television news in Hong Kong.
rates in China is still 2.5 percentage points below what they should be in the midst of rising labor costs, energy and food and a “huge bubble in the housing market, he said.
The central bank moved into the last day of a week’s vacation and before a report next week that may show consumer prices rose 5.3 percent in January.
That pace is slower than the most recent inflation rates in the Group of 20 countries including Brazil, Russia, India and Argentina, where consumer prices rose by 10.9 percent in December from a year earlier.
‘Anxiety’ Extra
“A rate increase was expected, but since it was delayed until the end of Chinese New Year, which created anxiety about the potential seriousness,” says Gavin Parry, executive director Parry International Trading Ltd. in Hong Kong. “Now that the uncertainty is removed, the markets may focus on trade in January, producer prices and consumer price data, the next week.”
Government hopes that next week the numbers are also forecast to show export growth accelerated in January producer prices advanced at a faster pace.
Shanghai stock index has lost 5.9 percent last year, partly on concern about the impact of the efforts of political leaders to clear a housing bubble in the loan market after registration. The MSCI Asia Pacific index rose 21 percent in that period compared.
A drought that threatens grain production and an increase in loan New Year add to the risks of inflation after the money supply increased by over 50 percent in two years. Economic growth accelerated in the fourth quarter at a rate of 9.8 percent.
Premier Campaign
In addition to the increases in rates and bank reserve requirements, inflation Wen campaign against extending the sales of state food reserves, subsidies for low-income people, and repression in speculation and hoarding.
China 0.75 percentage point increase in rates of one year from the global financial crisis compare with India to increase borrowing costs seven times for a total of 1.75 percentage points. In South Korea, where lawmakers are meeting this week to decide on rates, borrowing costs increased 0.75 percentage points so far.
Isaac Meng, a Beijing-based economist for BNP Paribas, said yesterday that he expected “rapid hardening, with rates rising as much as another 1.5 percentage points. Before the financial crisis, the rate of one-year loans was 7.47 percent, 1.41 percentage points above the level that comes into effect today.
On the move yesterday, the central bank raised rates for long-term deposits rather than loans. For savers, the increase was up 45 basis points for deposits of five years.
McDonald’s, Starbucks
“The goal is to encourage savers to keep their money in bank deposits instead of going to the shares or assets,” said Mark Williams, London-based economist with Capital Economics Ltd.
Companies Baoshan Iron & Steel Co. Starbucks Corp. and McDonald’s have raised prices. While wages are also climbing, Chinese consumers are more concerned about inflation than at any time in the last decade, according to a central bank survey released in December.
China’s government aims to keep inflation at 4 percent this year, state broadcaster CCTV reported in December. Officials also want to limit the risk of property bubbles in a flooded the economy with cash.
The foreign exchange reserves of China, the world’s largest, rose a record 199 billion U.S. dollars in the fourth quarter of 2.85 trillion U.S. dollars, and banks extended 7.95 trillion yuan (1.2 billion) of new loans last year, exceeding the government target maximum of 7.5 trillion yuan.
‘Ugly’ Number
The new loans may have increased to 1.2 trillion yuan in January. In December, the amount was only 481 billion yuan, a difference that reveals a pattern of lending banks more at the beginning of each year.
The government knows the January inflation “look ugly” and wants to be seen as acting in the period before the annual meeting of the National Popular Assembly, the lawmaking body of the country in early March, said Ma Jun, the Deutsche Bank AG, the chief China economist.
Inflation is largely driven by food costs. State Council said China must do more to ensure stable grain production, including by raising the minimum purchase prices for rice, state radio reported today.
The drought hit parts of the country could reduce grain output and undermine efforts to stabilize prices, Premier Wen said last week.
Last month, a jump in consumer spending before the Lunar New Year holidays and bad weather that damaged crops may have contributed to a higher inflation reading.
- Li Yanping, Shamim Adam, assisted by Darren Boey, Miguel Munoz, Jay Wang, Li Aquino Kristine and Susan. Editors: Paul Panckhurst, Josh Fellman.
