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Do not fear interest rate tool, says adviser

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Too much money is moving around the mainland economy and Beijing should not fear raising interest rates, despite concerns about growing inflows of hot money, according to a top government adviser.

'The level of excess liquidity has eased but there has been no fundamental turnaround,' Chen Daofu, vice-director of research at the State Council's financial think-tank, said in an interview with the China Securities Journal.

After surging at 18.9 per cent year on year in January, the broad M2 supply of money moderated to an unexpectedly weak 17.5 per cent in February.

However, with consumer price inflation hitting 8.7 per cent that month, the highest level for almost 12 years, Mr Chen warned that the risk of inflation remained 'severe' and that further monetary tightening measures might be necessary.

Although he did not specify that interest rates should be raised for the first time since December, he said fears about speculative inflows chasing marginal returns from the gap between United States and mainland interest rates were overblown and could backfire.

'If we abandon interest rate tools because a moderate amount of hot money is flowing in to take advantage of arbitrage opportunities, this will cause greater turbulence in asset prices, which in turn will attract more hot money to take advantage of rising asset prices,' Mr Chen said.

The central bank raised interest rates six times last year but it has held off further moves since the Federal Reserve made several aggressive rate cuts to help support the faltering US economy.

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