Further interest rate hikes are looking increasingly likely as
price indices continue to climb, a prominent economist said during
the Boao Forum for Asia.
Justin Yifu Lin, a professor at Peking University, said in a
speech that the central bank would this year make more use of
interest rates as a tool to adjust investment and consumption.
The consumer price index (CPI) for March was up 3.3 percent year
on year, driving the real interest rate into negative
territory.
Lin said that of the 16 categories of goods in the CPI basket,
four were going up and 12 were going down in 2003 and 2004. But
this year, 10 have been moving north and just six have been in
decline.
He said it remained imperative for the government to control
high investment.
Fan Gang, a member of the Monetary Policy Committee of the
People's Bank of China, offered his explanation for the high
investment growth rate in the past few years.
Speaking at the same session, he said that State enterprises'
rising profits, a distorted pricing system for natural resources
and the absence of a dividend collecting mechanism were behind the
growth.
Fan, who is also president of the National Economic Research
Institute, acknowledged that State firms' productivity had
increased over the past few years, and that this was part of the
reason for their higher profits.
However, he said another reason was that while the cost of
natural resources had increased significantly, State enterprises
were exempt from paying royalties for using them or were granted a
discounted price.
He said it was also interesting that the existing State
enterprise management system was designed for firms that were in
the red - a reflection of widespread loss making in the past.
Now, when firms make profits, they are not required to pay
dividends to the State, leaving them awash with money, which they
can use for new investment.
"We have to address this systematic defect," Fan said.
Responding to a question about the feasibility of encouraging
Chinese firms to invest overseas to help resolve the problem of
high foreign exchange reserves, Fan said that most enterprises were
not yet mature enough to be able to invest in foreign
countries.
In addition, "the whole world is coming to China to make things,
so why do we need to go overseas?"
He said that China had to be very cautious in opening up its
capital market.
"This issue is related to many sectors. We still have much to do
in terms of legal structures and regulations.
"We must draw on the lessons of the Asian financial crisis that
erupted a decade ago," Fan said.
(China Daily April 23, 2007)