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03/5/2004 16:31
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China May Raise Interest Rates as Early as Next Week - China's central bank may raise borrowing costs for the first time in nine years as early as next week's Labor Day holiday to help curb runaway investment that is stoking inflation, according to economists including Zhu Jianfang.
``The bank may raise lending rates during the week-long holiday by 50 basis points to signal its determination to cool the economy,' said Zhu, an economist at China Securities Research in Beijing. Alternatively, the bank may wait until June ``when inflation figures show the need for tougher measures,' he said.
Goldman Sachs Group Inc. predicts rates will rise by as much as a percentage point within the next 12 months and Credit Suisse First Boston is forecasting increases totaling two percentage points by the end of 2005. Deutsche Bank and Standard Chartered Bank estimate rates will be raised by half a point this year.
Expectations rates will rise are hardening as the government steps up efforts to cool growth in the world's sixth-largest economy. China this week ordered banks ``not to accelerate' lending ahead of the May 1 start of the Labor Day holiday, halted the building of a $1.3 billion steel mill and increased the amount of money companies must put up for steel, cement, aluminum and real-estate projects.
The yield on China's benchmark seven-year bond, which yesterday jumped 17 basis points to a record 5 percent, was 9 basis points lower at 3 p.m. in Shanghai. A basis point is 0.01 percentage point. The index of government bonds traded on the Shanghai stock exchange rose 1 percent to 92.17, having yesterday had its biggest drop since it was introduced in January 2003.
Inevitable
``The government is likely to raise interest rates during the holiday,' said Steven Xu, a Hong Kong-based economist at ICBC (Asia) Ltd. He declined to say how big a move he expects.
China's benchmark one-year lending rate is 5.31 percent and was last raised in 1995, when it was increased by more than a percentage point to 12.06 percent. Inflation at that time was more than triple the current rate. The one-year deposit rate is 1.98 percent and was last raised in 1993, when it reached 10.98 percent.
Li Yang, a member of the People's Bank of China's monetary policy committee, said an interest rate increase is inevitable unless the latest measures work, the Shanghai Securities News reported yesterday.
The monetary policy committee is headed up by bank Governor Zhou Xiaochuan and consists of 13 members, including Guo Shuqing, head of China's foreign currency watchdog and Shang Fulin, head of the nation's securities regulator. The committee submits its recommendations to the State Council, China's cabinet, which has final authority over interest-rate decisions.
At Odds
Policy makers are at odds with the State Council on whether to raise rates, said analysts including Zhou Li, head of the fixed-income research department of Guotai Junan Securities Co. in Shanghai.
``The central bank doesn't want to raise rates, the State Council does,' said the research chief.
Central bank Governor Zhou as recently as April 17 said the bank had no plans to raise interest rates. A month earlier he said the nation's inflation rate wasn't high enough to justify raising interest rates.
Song Guoqing, who is a senior economist at China Center for Economic Research of Beijing University and makes policy suggestions to the State Council, said in March that China should raise interest rates in a timely manner to prevent inflation accelerating, according an official Web Site of the State Information Center.
Inflation
``Whether China will raise interest rates depends on whose advice the State Council follows,' said Yuan Rongsheng, an official in the research department of the People's Bank of China's Shanghai branch.
China's inflation accelerated to 3 percent in March from 2.1 percent in February, close to January's 6 1/2-year high of 3.2 percent. The economy grew a faster-than-expected 9.7 percent in the first quarter, barely slowing from a 9.9 percent pace in the previous three months, and fixed-asset investment jumped 43 percent, almost double's last year's growth rate.
Investment in factories, offices and other fixed assets boomed in the first quarter even after the government raised banks' reserve requirements last year and tightened rules governing lending to industries it considered to be expanding too fast. The nation's M2 money supply grew 19.2 percent from a year earlier in March, exceeding the central bank's 17 percent growth target.
The South China Morning Post, citing unidentified bankers, reported today that China's central bank plans to raise lending rates by half a percentage point at the end of next week. The bank is also considering raising deposit rates by a quarter of a percentage point and held an emergency meeting yesterday to discuss measures to curb investment and slow economic growth, the report said.
Power, Transport
China's central bank declined to confirm or deny the report.
``I don't have any information on interest rate changes at the moment and I will not forecast any policy change during the May holiday,' said Bai Li, spokesman for the central bank. ``The media doesn't need to know whether we held any meetings yesterday.'
To be sure, not everyone is expecting China's central bank to raise borrowing costs. Yiping Huang, chief economist at Citigroup Global Markets Asia in Hong Kong, said the probability of a rate increase has risen in recent months but is still ``less than 50 percent.'
The investment plans of state-owned enterprises, which are responsible for much of the expansion the government is trying to curb, aren't very sensitive to borrowing costs, he says. Also, higher rates may damp consumer spending, which the government is trying to stimulate, and cool investment in industries including power and transport where the state is trying to encourage investment.
Banks
Tim Condon, head of Asian financial markets research at ING Groep NV, said any rate rise will likely be modest as the central bank won't want to force more loan defaults. Official figures show about a fifth of Chinese banks' loans are non-performing.
``The government is reluctant to raise interest rates to cool overheating because of the adverse impact of higher rates on the state banks,' he said. ``To minimize the adverse impact on banks, we expect they will raise lending rates but not deposit rates.'
Condon said he expects lending rates to rise by a quarter of a percentage point in three to six months. Raising lending rates and leaving deposit rates unchanged would improve banks' net interest margins, helping boost revenue.
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``The bank may raise lending rates during the week-long holiday by 50 basis points to signal its determination to cool the economy,' said Zhu, an economist at China Securities Research in Beijing. Alternatively, the bank may wait until June ``when inflation figures show the need for tougher measures,' he said.
Goldman Sachs Group Inc. predicts rates will rise by as much as a percentage point within the next 12 months and Credit Suisse First Boston is forecasting increases totaling two percentage points by the end of 2005. Deutsche Bank and Standard Chartered Bank estimate rates will be raised by half a point this year.
Expectations rates will rise are hardening as the government steps up efforts to cool growth in the world's sixth-largest economy. China this week ordered banks ``not to accelerate' lending ahead of the May 1 start of the Labor Day holiday, halted the building of a $1.3 billion steel mill and increased the amount of money companies must put up for steel, cement, aluminum and real-estate projects.
The yield on China's benchmark seven-year bond, which yesterday jumped 17 basis points to a record 5 percent, was 9 basis points lower at 3 p.m. in Shanghai. A basis point is 0.01 percentage point. The index of government bonds traded on the Shanghai stock exchange rose 1 percent to 92.17, having yesterday had its biggest drop since it was introduced in January 2003.
Inevitable
``The government is likely to raise interest rates during the holiday,' said Steven Xu, a Hong Kong-based economist at ICBC (Asia) Ltd. He declined to say how big a move he expects.
China's benchmark one-year lending rate is 5.31 percent and was last raised in 1995, when it was increased by more than a percentage point to 12.06 percent. Inflation at that time was more than triple the current rate. The one-year deposit rate is 1.98 percent and was last raised in 1993, when it reached 10.98 percent.
Li Yang, a member of the People's Bank of China's monetary policy committee, said an interest rate increase is inevitable unless the latest measures work, the Shanghai Securities News reported yesterday.
The monetary policy committee is headed up by bank Governor Zhou Xiaochuan and consists of 13 members, including Guo Shuqing, head of China's foreign currency watchdog and Shang Fulin, head of the nation's securities regulator. The committee submits its recommendations to the State Council, China's cabinet, which has final authority over interest-rate decisions.
At Odds
Policy makers are at odds with the State Council on whether to raise rates, said analysts including Zhou Li, head of the fixed-income research department of Guotai Junan Securities Co. in Shanghai.
``The central bank doesn't want to raise rates, the State Council does,' said the research chief.
Central bank Governor Zhou as recently as April 17 said the bank had no plans to raise interest rates. A month earlier he said the nation's inflation rate wasn't high enough to justify raising interest rates.
Song Guoqing, who is a senior economist at China Center for Economic Research of Beijing University and makes policy suggestions to the State Council, said in March that China should raise interest rates in a timely manner to prevent inflation accelerating, according an official Web Site of the State Information Center.
Inflation
``Whether China will raise interest rates depends on whose advice the State Council follows,' said Yuan Rongsheng, an official in the research department of the People's Bank of China's Shanghai branch.
China's inflation accelerated to 3 percent in March from 2.1 percent in February, close to January's 6 1/2-year high of 3.2 percent. The economy grew a faster-than-expected 9.7 percent in the first quarter, barely slowing from a 9.9 percent pace in the previous three months, and fixed-asset investment jumped 43 percent, almost double's last year's growth rate.
Investment in factories, offices and other fixed assets boomed in the first quarter even after the government raised banks' reserve requirements last year and tightened rules governing lending to industries it considered to be expanding too fast. The nation's M2 money supply grew 19.2 percent from a year earlier in March, exceeding the central bank's 17 percent growth target.
The South China Morning Post, citing unidentified bankers, reported today that China's central bank plans to raise lending rates by half a percentage point at the end of next week. The bank is also considering raising deposit rates by a quarter of a percentage point and held an emergency meeting yesterday to discuss measures to curb investment and slow economic growth, the report said.
Power, Transport
China's central bank declined to confirm or deny the report.
``I don't have any information on interest rate changes at the moment and I will not forecast any policy change during the May holiday,' said Bai Li, spokesman for the central bank. ``The media doesn't need to know whether we held any meetings yesterday.'
To be sure, not everyone is expecting China's central bank to raise borrowing costs. Yiping Huang, chief economist at Citigroup Global Markets Asia in Hong Kong, said the probability of a rate increase has risen in recent months but is still ``less than 50 percent.'
The investment plans of state-owned enterprises, which are responsible for much of the expansion the government is trying to curb, aren't very sensitive to borrowing costs, he says. Also, higher rates may damp consumer spending, which the government is trying to stimulate, and cool investment in industries including power and transport where the state is trying to encourage investment.
Banks
Tim Condon, head of Asian financial markets research at ING Groep NV, said any rate rise will likely be modest as the central bank won't want to force more loan defaults. Official figures show about a fifth of Chinese banks' loans are non-performing.
``The government is reluctant to raise interest rates to cool overheating because of the adverse impact of higher rates on the state banks,' he said. ``To minimize the adverse impact on banks, we expect they will raise lending rates but not deposit rates.'
Condon said he expects lending rates to rise by a quarter of a percentage point in three to six months. Raising lending rates and leaving deposit rates unchanged would improve banks' net interest margins, helping boost revenue.