The Chinese government has used a number of measures - including
raising bank reserve requirements, reining in lending to overheated
sectors, adjusting industrial policies and implementing price
controls - to cool the red-hot economy, which grew 9.8 percent in
the first quarter. However, economists and industry insiders are
arguing that an interest rate hike will be needed to secure a soft
landing for the Chinese economy. The pressure may lead the central
bank to raise interest rates for the first time in nine years.
"We are hesitant and slow to react to overheating," wrote Hu
Shuli, the chief editor of Beijing-based Caijing
Magazine.
The debate on overinvestment started last year, but most
officials and economists believed that China's economy was healthy
at that time. GDP grew 9.1 percent last year, despite the SARS
epidemic.
It wasn't until early 2004 that the issue was put at the top of
the State Council's agenda. Excessive investment has aggravated
coal, electricity and oil shortages, hampered structural
optimization of the economy and heightened inflationary pressures.
The People's Bank of
China (PBOC), the nation's central bank, raised bank reserve
requirements twice in March. The China Banking Regulatory
Commission also issued regulations to curb lending in some
overheated sectors like steel, real estate and aluminum.
These measures seem to have had a limited impact on the soaring
economy. China's GDP still swelled 9.8 percent in the first
quarter. Fixed asset investment reached 879.9 billion yuan
(US$106.0 billion), up 43 percent year-on-year. The April consumer
price index (CPI), an important inflation gauge, also jumped to 3.8
percent, compared with 2.8 percent for the first quarter. As for
lending, the central bank said in its recently released monetary
report that money supply in the first quarter grew 17 percent and
new loans reached 2.6 trillion yuan (US$313.0 billion), the second
highest in history.
"The facts prove that these measures have had little impact on
the overheated economy," wrote Hu. "It will be hard to curb
inflation unless more effective tightening policies are
adopted."
The Economic Observer, a well-known business newspaper
in China, put the issue on its front page last week, under the
somewhat desperate title of, "Interest Rate Rise, the Last
Tool."
With the exception of a rate hike, the central bank has done
everything it can to cool the national economy and maintain RMB
stability, the article said.
Meanwhile, the government has intervened in lending, fixed-asset
investment and pricing.
In April, the State Council called for attention to some new
problems in the economy, especially excessive investment in fixed
assets and shortages of coal, power, oil supplies and
transportation facilities.
Also in April, construction of a major steel smelting facility
in east China's Jiangsu Province was brought to a screeching halt
for alleged illegal land expropriation and borrowing. The move is
widely believed to have been part of the effort to halt undesirable
construction in an overheated sector.
The State Development and Reform Commission also conducted a
nationwide price inspection. Local governments were told to halt
utility price hikes if inflation in their areas gets out of
hand.
However, the intervention was criticized as excessive.
"The fundamental reason for overinvestment is an immature market
system," said the Economic Observer article. "The target
of government intervention is to curb government-dominated
investment, but other things should be decided by market forces and
macro-economic measures."
Hu Shuli also warned, "Government intervention in the economy
contradicts China's market system reform, and since the central and
local governments have different objectives, intervention does not
have the intended result. Instead, it increases the risk of a hard
landing."
But the government's intervention does indicate the urgency of
its desire for a soft landing, making the possibility of an
interest rate adjustment that much stronger. Economists and many
industry insiders have voiced their expectations of a hike.
"If the CPI stays at the 3-percent level or higher in the coming
months, there would be a possibility of raising the interest
rates," said China Securities economist Zhu Jianfang in a China
Daily interview.
Yuan Gangming, a senior economist with the Chinese Academy of
Social Sciences, reportedly said the government should already have
raised interest rates to deal with the increasing inflationary
pressure.
But Yi Xianrong, another economist at the academy, takes a
dissenting view. He said there is little possibility that the CPI
would rise rapidly and thus, "There is no need to adjust the
interest rate to balance demand and supply." Yi said that current
price levels are bearable and actually create a better environment
for the reform of state-owned enterprises.
In its monetary report, the central bank takes a wait-and-see
attitude. Although at an April forum PBOC Governor Zhou
Xiaochuan and Vice Governor Wu Xiaoling denied any immediate
plans to adjust interest rates, everything suggests that a hike
will be the tool of last resort if current policies fail. Even at
that time Wu admitted that, "If the inflation rate keeps rising,
leading to an actual negative lending rate, the central bank would
consider raising lending interest rates from the current 5.3
percent."
At this week's Beijing International Finance Forum, Zhou said
that the central government is continuing to monitor prices and
keeping a close watch on the CPI. China's interest rate, slashed
eight times in the past nine years, is at a historical low. The
benchmark one-year bank deposit rate is now set at 1.98
percent.
"At present, the most direct and effective way is to raise
interest rates," wrote editor Hu Shuli. She added that although a
rate hike would have an impact on the domestic stock market, real
estate and banks, it is the last chance to achieve the soft landing
goal. "We can't lose that chance," she wrote.
"According to my observation, the lending rate will be raised if
necessary, especially for the medium- and long-term loans," Wang
Mengkui, director of the State Council Development Research Center,
told the Economic Observer.
But the central bank is reluctant to lift deposit rates before
the US Federal Reserve raises its interest rates. "The PBOC is
afraid of foreign capital inflow and resultant pressure on the
renminbi rate," the Economic Observer reported.
(China.org.cn by Tang Fuchun May 20, 2004)