Bigger rate rises on way, bank chief hints

PUBLISHED : Friday, 19 October, 2007, 12:00am
UPDATED : Friday, 19 October, 2007, 12:00am

Zhou Xiaochuan says he has tools to deal with rising prices in surging economy

People's Bank of China governor Zhou Xiaochuan yesterday strongly hinted at further monetary tightening soon, saying that more frequent and bigger adjustments were possible.

Mr Zhou's comments came as a senior economic planner suggested the mainland's consumer inflation had eased to 6.2 per cent last month, from the decade-high of 6.5 per cent in August, while the overall economic growth in the third quarter slowed from the second quarter's sizzling 11.9 per cent year on year gain.

'The strength of our policy to soak up liquidity is not enough and we still need to step up our efforts,' Mr Zhou said on the sidelines of the 17th National Congress of the Communist Party.

When asked if the central bank needed to increase the magnitude of its rate increases, Mr Zhou said there was room to adjust the frequency or degree of change in its interest rates and reserve requirement ratio.

'For instance, with interest rates, we can raise them by 0.25 or 0.54 percentage points. And for reserve requirement ratios, we can select 0.25, 0.5 and 1.0 percentage point. We have the room to select.'

Beijing has raised interest rates five times and banks' reserve requirements eight times so far this year to contain inflation.

Economists have suggested that the central bank be more aggressive in its tightening.

Zhu Zhixin , a vice-chairman of the National Development and Reform Commission, told a separate briefing that the economic growth in the third quarter may be similar to that of the first half. He did not give a specific figure.

The GDP grew 11.5 per cent in the first half.

'Prices may run at a high level for some time, but the possibility of a significant price rise is small,' Mr Zhu said.

The National Bureau of Statistics will officially issue third quarter economic data on Tuesday.

Tao Wang, a China economist with Bank of America, said a growing consensus seemed to have formed among key economic agencies on the pressing need to control inflation.

'With a continued large trade surplus and forex inflows, which leads to fresh liquidity in the system if not fully sterilised, the PBOC would have to use all the tools available to prevent the money supply from growing too fast,' Mr Wang said, adding that he expected a further 27 points rate increase after the congress.

Mr Zhou said he believed that CPI increase may stay high in October and November, but slow in December as seasonal factors took effect. He said the central bank was paying attention to asset prices. Prices of property and stocks have surged to record highs, fuelling fears that an assets bubble is forming.

'The main concern of the central bank's key monetary policy is the overall prices. However, we also pay a certain degree of attention to asset prices,' Mr Zhou said. 'But if there are overly large fluctuations in asset prices, then monetary policy can play a role in stabilising the economy.'

Bothered by sizzling growth, the Chinese leadership has taken a series of measures to cool down the economy in the past year.

Mr Zhou appeared to indicate a faster yuan appreciation as part of the government's tightening mix by saying the government will strengthen using interest rates, reserve requirement ratios and exchange rates in macro control. Economists said that faster appreciation of the yuan would help cool growth.

Mr Zhou said there was no timetable for the convertibility of yuan under the capital account but 'the direction is clear'.

He said that he was 'sympathetic' to Europe's concern about the yuan's rise against the single currency, saying China's rising trade surplus was behind EU complaints.

On Chinese banks' complaints about expanding business in the US, Mr Zhou said progress was being made between the two governments. 'It's a small subject in the Sino-US strategic economic dialogue, and the two sides are talking over this. I believe there will be progress, because it is now moving in a positive direction.'