PBOC chief sees room for rate rises but points to constraints

PUBLISHED : Friday, 07 March, 2008, 12:00am
UPDATED : Friday, 07 March, 2008, 12:00am

People's Bank of China governor Zhou Xiaochuan said yesterday there was scope for further interest-rate rises on the mainland but conceded domestic and international factors would be taken into consideration.

'There's certainly room for an interest-rate increase,' Mr Zhou told a press conference at the National People's Congress meeting. 'But we have to consider the benefits and defects, as well as the timing of any adjustment.'

He said sharp cuts in lending costs by the United States Federal Reserve had created a gap between the mainland and the world's largest economy and this was something the PBOC must take into consideration as it pondered further adjustments.

The central bank also had to consider the impact of higher borrowing costs on the capital markets as low rates could boost capital market investment. 'China has many domestic factors to consider in any interest-rate adjustment,' he said.

The PBOC last year raised rates six times to slow runaway growth and control inflation, which now stands at its highest in more than a decade.

World Bank chief economist-in-waiting Justin Lin Yifu yesterday called for further interest-rate rises.

However, Huang Yiping, the chief Asia economist at Citigroup, said the room for Beijing to boost interest rates further was not large, given the fragile state of the global economy and a possible recession in the US.

'We expect further rate rises, but the room for adjustment is not big,' Mr Huang said, citing a US slowdown that could hurt mainland exports.

Mr Zhou said a faster appreciation of the yuan might help control inflation, but its impact would be limited. Beijing would use a combination of policies to combat inflation.

Premier Wen Jiabao pledged to increase the yuan's flexibility in his policy address on Wednesday. The currency has appreciated about 15 per cent against the US dollar since July 2005, when the government delinked its decade-old peg to the greenback and allowed the yuan to move in a controlled range.

The yuan rose four basis points to hit a central parity rate of 7.1168 yuan per dollar yesterday.

Mr Zhou warned that the impact of the US subprime mortgage crisis could not be underestimated. 'There will be a further indirect impact from the US subprime crisis on China's economy in the future. It cannot be underestimated since it is far beyond previous experiences,' he said.

He said changes to the global economy and international trade caused by the downturn in the US would affect the mainland's economy in different phases.

Separately, he said Beijing would let individuals invest overseas step by step. But he did not specify the timing of the much-anticipated 'through-train' programme to allow them to directly invest in Hong Kong-listed stocks.

'All the measures that can boost individual overseas investment will be launched at an appropriate time and at an appropriate pace,' Mr Zhou said.