China facing pressure to raise interest rates to rein in inflation

 

China is under strong pressure to raise interest rates to rein in surging prices, a central bank adviser says, as state-media said Thursday that inflation likely rose above 7 per cent in January.
 

The challenge is in countering inflation and keeping China’s currency steady at a time when the US is slashing interest rates to stimulate its own wobbling economy, Fan Gang, an adviser to the central bank, said in comments to the Communist Party newspaper People’s Daily.


“We have to stick to a tight monetary policy to prevent rising prices from fueling overall inflation,” it quoted Fan as saying.

“Right now our interest rates are relatively low while price levels are relatively high,” he said. “Some short-term deposit rates are still negative in real terms. This means there is still pressure in the economy to raise interest rates.”


China raised interest rates six times last year and increased the amount of reserves banks are required to hold on 10 occasions, seeking to cool investment and counter inflation. Authorities will continue to use those policy tools, Fan said without giving specifics.

A report in another the state-run newspaper, Wen Hui Bao, forecast Thursday that the inflation benchmark for January surged above 7 per cent, largely due to soaring food and fuel prices.
 

A recent bout of severe winter storms aggravated shortages, causing supply disruptions and damaging crops at a time when demand is traditionally high due to the Lunar New Year holidays while supplies tend to be tight.


Consumer prices were 6.5 per cent higher than a year earlier in December. January figures, due to be released next week, are expected to top that decade-high level, the Shanghai-based newspaper Wen Hui Bao said Thursday. Other reports have carried similar forecasts.

Fan, the central bank adviser, said China would adapt its economic policy to changing domestic and international trends, such as the US slowdown.

But he ruled out a one-step revaluation of the Chinese currency - subject of much speculation as the Chinese yuan’s gains against the US dollar have accelerated in recent weeks, as “impossible.”

“That is not a choice that would benefit stable economic development,” Fan said, reiterating Beijing’s contention that major fluctuations in the yuan’s value could damage the financial system.


“In my own opinion, the renminbi (yuan) should continue to rise in a gradual, controlled manner suitable to developing the economy,” Fan said.

The yuan’s value against the dollar, set at 7.1890 Thursday morning, has risen by just over 11 per cent since July 2005, when China revamped its foreign exchange system, revaluing the currency by about 2 per cent. (AP)
 
 
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