A leading member of Chinas monetary policy committee
has called on authorities to raise interest rates to cool an
overheating economy as the Peoples Bank of China
moved yesterday to hike bank reserve requirements, while
leaving benchmark rates unchanged.
PBoC monetary policy committee member Li Daokui told
Emerging Markets that higher interest rates are needed
to combat inflation and prick the bubble in Chinas
high-end property market.
Higher inflation and low interest rates are eroding
Chinese savings in bank deposits and encouraging Chinese people
to buy more property, worsening the bubble problem, Li
said in a telephone interview.
But finance minister Xie Xuren warned that Chinas
economic recovery remains on shaky ground, and added that
authorities would continue to stimulate domestic demand by
The foundation of the economic turnaround is not
solid, so we will continue fiscal stimulus, Xie said
yesterday in Tashkent. Chinas policymakers have resisted
unwinding stimulus measures until the global economic recovery
is well entrenched.
The PBoC, headed by governor Zhou Xiaochuan, said in a
notice on its website that the reserve requirement ratio for
banks would be raised by 50 basis points from May 10. This
attempt to rein in new lending came amid fears of a property
bubble and economic overheating.
Li, economics professor at Tsinghua University and one of
three academics who replaced monetary policy committee member
Fan Gang at the end of March, stressed that any imminent
tightening of interest rate policy does not represent the
central banks official stance. But although the PBoC does
not set interest rates, such comments from a monetary policy
official carry weight in Beijing.
Li also noted higher interest rates would be
helpful in reducing inflation expectations. Markets
predicted in January that the PBoC would hike rates in the
second quarter of the year.
In March, consumer prices rose 2.4% year-on-year, a rate
higher than the 2.25% interest rate on one-year certificates of
bank deposits. Real interest rates are projected to hit minus
0.5% over the next year.
To date, China has relied on regulation to curb excesses in
the high-end housing market in the so-called tier one cities,
principally Beijing and Shanghai. Property prices there rallied
by between 50% and 100% last year, Morgan Stanleys China
strategist, Jerry Lou, said. This was partly fuelled by
misdirected bank loans, he said.
The government last week ordered developers to submit
fund-raising plans for review, in order to stem speculative
property developments. These measures come on top of stricter
limits on bank lending for property investment as part of the
governments much-publicised bid to prick the real estate
Li also said the government should introduce a nationwide
property tax, step up punitive taxes on those with more than
one home, restrict property purchases in a given municipality
to local residents or workers, and build more state-backed
housing for young workers. These measures would reduce
speculative real estate investments.
Li said it was absolutely essential to develop
the mutual fund industry and corporate bond market, to provide
an outlet to soak up excess Chinese savings and curb asset