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Sandy Li

Beijing is expected to raise interest rates twice more in the first half of this year as it redoubles efforts to combat soaring inflation.
But efforts to rein in prices could mean more trouble for the property market and slower economic growth.
The People's Bank of China raised the deposit and lending rates by 0.25 percentage points on Tuesday, a week before the official release of January's consumer price index, which is expected to be up 5.4 per cent year on year.
Economists had expected the increase in interest rates, the third in just four months, since Beijing has stepped up its efforts to rein in the  overheated real estate sector.
'The consensus is that the central bank will raise interest rates [further] in order to move the real deposit rate into positive territory,' said Cheng Weiqing,  an analyst with Citic Securities.  'All eyes will be on the property market since the policies could lead to a severe downturn in the sector.'
The mainland's benchmark one-year deposit rate now stands at 3 per cent, while the lending rate is 6.06 per cent.
The deposit rate is still 1.5 percentage points lower than the projected consumer price growth for the year of 4.5 per cent.
Analysts expect inflation last month accelerated to 5.4 per cent, beating  November's 28-month high of 5.1 per cent. The National Bureau of Statistics   will announce the inflation data on Tuesday.  
'Another two interest rate hikes are needed to allay concerns of inflation,' said Shenyin Wanguo Securities  chief economist Li Huiyong.  'It is highly expected that the two increases would be implemented within the first half. 'Inflation and asset bubbles are threatening to derail  the mainland's fast-growing economy, with Beijing tightening monetary policies to avoid a hard landing and put the lid on the social unrest that rising prices can generate.  
Beijing often unveils major economic initiatives during national holidays.  Tuesday was the last day of the week-long Lunar New Year holiday, and stocks fell yesterday on the first day of trading on mainland exchanges following the holiday. 
The benchmark Shanghai Composite Index fell 24.9 points or 0.89 per cent to 2,774.07 yesterday following a seven-day break.
The world's third-worst-performing  market last year -  when the index dropped 14.3 per cent - has dropped a further 1.2 per cent so far this year.
Analysts said heightened expectations of further tightening had hurt equity investors' confidence in the property market.
Alan Chiang Sheung-lai,  head of residential property research at DTZ,  expects property sales to  drop by as much as 70 per cent from last month.
'It will have a big impact as sales have already been hit after the State Council imposed home purchase limits to curb investment,' he said.
 The cabinet last month announced  nationwide policies aimed at curbing housing demand and property prices. Citizens were barred  from buying another home  if they already own more than two properties in the city in which they are residents.
'The market was pretty quiet during the Lunar New Year and the sudden announcement of an interest rate rise will certainly give another blow to confidence,' said Pak Kei-yuen,  a senior general manager in the Beijing office of Hong Kong estate agency Midland Realty.  
Following the rise, homeowners will have to pay an additional 117 yuan per month for every 1 million yuan they have borrowed from banks on a 20-year term.
'It will increase property transaction costs if several rounds of interest rate rises are announced this year,' he said. Pak said would-be homebuyers would baulk at the higher interest payments.
 The buoyant property market contributes  greatly to the  mainland economy.  
An ailing real estate market could be a significant drag on  economic growth.
'While residential real estate prices have yet to go down in response to any of the government's efforts to date, the increasing number of measures being employed can be expected to reduce investor confidence in the near term,' Colliers International said in a report. 
'The primary consequence of this will most likely be a rapid decrease in the number of new transactions taking place.'
Beijing is also tipped to raise banks' reserve requirement ratio again soon to reduce the amount of money available to consumers,  international banks predict.
HSBC  said in a report that the central bank would order banks to set aside another 1.5 per cent of cash as reserves. 
Meanwhile, the Royal Bank of Scotland said in a report: 'Market sentiment is expected to stay weak in the bank sector in the short term. 
'We expect the performance of the banking sector could be capped by forthcoming' reserve ratio hikes and more interest rate increases.'
Flat earth
Beijing needs to address inflation without hurting the property sector 
For every one million yuan borrowed, homeowners face paying this much more a month on their mortgages: 117 yuan



More rate rises set to squeeze property market