China's central bank is poised to raise the country's interest rates for the first time in nine years, as a slew of macroeconomic statistics, due for release this week, will likely show rising inflation and increasing speculative investments.

A senior official with the National Bureau of Statistics, who refused to be named, said the industrial production figure for August and the consumer price index (CPI), the two most important economic data, will likely be released today.

Due to the lagging effects of the government's credit-tightening measures earlier this year, the CPI figures, the crucial gauge for inflation, will most likely reach this year's peak in August, while other figures will probably show signs of waning momentum, the source said.

Many economists believe there is little doubt the central bank, the People's Bank of China (PBOC), will raise benchmark lending rates, which currently is 5.31 percent.

BOC officials have warned such action could be taken if inflation surpassed 5 percent.

But PBOC officials have denied the bank was preparing a formal plan to raise the one-year lending rate to 5.76 percent, despite widespread speculation in the media in recent weeks.

Media have reported the interest rate will be raised either before or during the week-long National Day holidays, which will be held in the first week of October.

PBOC Governor Zhou Xiaochuan last Tuesday said such predictions "do not represent the central bank's viewpoint."

Those remarks were reported by Beijing-based Economic Daily.

Li Yang, a member of PBOC's Monetary Policy Committee, said the bank "has not yet decided to raise interest rates, let alone to how much to raise the rates."

He said PBOC will place an emphasis on August's statistics, at which time the bank will consider readjusting interest rates.

"There has not been a formal discussion about raising interest rates," he said.

Despite the central bank's denials, economists predict PBOC will probably have no choice but to raise interest rates, as the economy faces rising inflation and increasing speculative investments.

PBOC has been under mounting pressure to raise rates, as the CPI has risen 3.6 percent in the second quarter, from 2.8 percent in the year's first three months.

Higher interest rates could be the only cure for the country's investment mania ... especially in the real estate sector," said Yi Xianrong, an economist with the Chinese Academy of Social Sciences.

PBOC will have to use interest rates to cool off the nation's overheated real estate sector, as domestic property prices are soaring, without signs of slowing down, he said.

"A higher lending rate will dampen investors' desire to borrow from banks to finance their investments in the real estate sector," Yi said.

China's CPI rose 5.3 percent year-on-year in July. That means, in essence, a home buyer who borrowed money last year at 5.31 percent could repay the loan without paying interest, after making an adjustment for inflation.

Loans to land developers and mortgages to home buyers have become a main source of profitability for the country's commercial banks, Yi said.

"Commercial lenders are encouraged to create mortgage loans, which are considered high-quality assets. But such relentless lending has helped inflate property prices," Yi added.

By the end of June, bank loans to the real estate sector had reached 2.1 trillion yuan (US$253 billion), up 36.1 percent year-on-year.

Meanwhile, new investments in land development increased 28.7 percent, indicate statistics.

A recent survey by the National Bureau of Statistics indicated the average property price in 35 Chinese cities increased 10.4 percent in the year's second quarter, compared with a year ago.

In Shanghai, the growth rate reached an astonishing 20 percent.

Industrial prices rose 14 percent in the year's first seven months. That increase is a better indicator than the CPI of the business conditions faced by private and State-owned companies. It also indicates actual interest rates in China have been deeply negative, economists said.

Yet, there have been a few signs that administrative measures, such as restrictions on bank loans, have slowed the economy in the last few months.

Industrial output rose 15.5 percent in July, compared with a year earlier, down from a peak of 23 percent in February.

"Closely related to the overheating of the real estate sector, prices of steel and cement also grew at a faster pace earlier this year," said Tang Min, a senior economist with the Asian Development Bank's Beijing office.

In July, steel prices rose 2.1 percent, compared with June. That was up 18 percent from a year ago, indicate PBOC figures. Meanwhile, the price of cement rose 4.7 percent, compared with June, and 11.6 percent year-on-year, the central bank said.

"Clearly, the overheating of the country's real estate sector cannot be easily dealt with without interest rate rises," he said.

There are also concerns tighter monetary policies in the United States and Europe will cause an outflow of capital from China, which will affect the stability of the country's fixed foreign exchange rate regime.

So, higher interest rates will mean more international speculative funds will stream into China in search of capital gains on bank deposits related financial products.

But some economists suggest a mild increase, of 0.25-1 percent in the lending rate, will have a minor effect on attracting speculative funds into the country.

"A 0.25-percentage-point increase in the interest rate in the United States will not make hot money leave China. Even a 1-percentage-point rise will not be big enough to make hot money leave China," said Martin Feldstein, president of the National Bureau of Economic Research in the United States.

(China Business Weekly September 17, 2004)