CHINA will need to implement further tightening, even after the fifth interest rate hike this year, to curb the fastest inflation since 1996

CHINA will need to implement further tightening, even after the fifth interest rate hike this year, to curb the fastest inflation since 1996 and dampen speculation in stocks and real estate, experts said.

‘The economy is really showing signs of overheating,’ said CFC Seymour strategist Dariusz Kowalczyk. ‘This makes China nervous enough to be more aggressive in its monetary policy.’

The benchmark one-year lending rate has increased to a nine-year high of 7.29 per cent from 7.02 per cent, with effect from last Saturday, the central bank said on its website.

A record trade surplus of US$161.8 billion (S$244.6 billion) in the first eight months of this year has flooded the economy with cash, pushing up consumer prices at twice the central bank’s target pace.

The benchmark CSI 300 Index for China’s yuan-denominated A shares has quadrupled in the past 12 months as investors sought better returns than those on offer at banks.

Home prices in cities have risen too, up by 8.2 per cent last month from a year earlier.

‘This is doing nothing to help stem the flow of money into the A-share market,’ said Societe Generale economist Glenn Maguire.

‘There’ll likely be one more move on lending rates this year. Deposit rates will also go up because, with inflation rising, real interest rates are negative.’

The central bank said it wants to strengthen monetary and credit controls, guide investment growth and stabilise inflation expectations.

The one-year deposit rate will rise to 3.87 per cent from 3.6 per cent.

Last Friday’s action on rates came after the statistics bureau said spending on factories, equipment and property had climbed 26.7 per cent in the eight months to August from a year earlier.

Soaring food costs also pushed inflation to 6.5 per cent in August, more than double the 3 per cent annual target set by the central bank.

‘We were too conservative and we are now bringing forward our forecasts,’ Standard Chartered economist Stephen Green wrote in a report after the bank’s decision. ‘We now think one more 27-basis-point hike this year and then another two in the first quarter.’



Source: BLOOMBERG NEWS (The Straits Times 17 Sept 07)