Zhu Min urges caution on using 'heavy-duty weapon' of rate rises

PUBLISHED : Friday, 26 March, 2010, 12:00am
UPDATED : Friday, 26 March, 2010, 12:00am

The deputy governor of the People's Bank of China Zhu Min has assuaged investors' concerns over inflation and the yuan exchange rate and stressed the need for re-balancing in the global economy, but downplayed the possibility of interest rate increases.

Speaking at the Credit Suisse Asian Investment Conference yesterday, Zhu said that despite higher than expected inflation rates last month - with the consumer price index increasing 2.7 per cent and the purchasing power index gaining 5.6 per cent - inflation is still under control and the figures simply reflect strong demand.

The central government has targeted price inflation of 3 per cent for this year.

Zhu said 2.2 per cent of the PPI increase can be accounted for by food prices, which were particularly high last month because of heavy consumption during the Lunar New Year and poor weather pushing up prices, especially for pork.

A Moody's Economy.com report said price pressures are likely to shift from food to fuel in the coming months as the weather improves and the fuel pricing regime is liberalised to allow more short-term and responsive price changes.

He also said that as productivity increases in line with prices, overcapacity will have the effect of tempering inflationary pressures.

Zhu said central banks should be cautious about using a 'heavy-duty weapon' such as interest rates as a method of keeping inflation in check, and added that rates are simply one of many tools that are now at the disposal of central banks as a result of the economic crisis.

'The crisis changed the role of central banks, as they need to take more responsibility for financial stability and growth ... The toolbox has expanded.'

Zhu pointed out that the latest statistics on loan growth suggest that moves to rein in credit growth are good indicators that lending is returning to healthy levels.

'We need to carefully guide loans and smooth loan growth. Loan growth has traditionally been strong towards the end of each quarter as companies settle their accounts, but this quarter we're seeing it slow down.'

He did, however, acknowledge that there is overcapacity in some sectors such as steel, where output reached 700 million tonnes last year, an excess of 160 million tonnes.

Zhu emphasised the need for a re-balancing of the global economy, and said that China 'should and could import more to keep its surplus smaller'.

In real terms the yuan exchange rate has been appreciating but China would continue to manage its floating exchange rate based on market demand against a basket of currencies, he said.

The Ministry of Commerce said this week that the mainland is expecting a trade deficit for this month, its first in six years, but economists are largely in agreement that this is a commodities-led blip rather than a turning point in the trade surplus.

Excess output

There is overcapacity in some sectors such as steel, where output last year reached, in tonnes: 700m