China's central bank raises growth forecast for 2008

China's central bank raises growth forecast for 2008
Economy may grow 11.6%; inflation seen rising by 5%

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(SHANGHAI) The People's Bank of China's research department raised its economic growth forecast and said inflation will probably accelerate.



High demand: The People's Bank of China has raised interest rates on some home mortgages and increased minimum down payments to cool property prices gains
The economy may grow 11.6 per cent this year, according to the report published in the China Securities Journal, faster than the agency's June estimate for a 10.8 per cent expansion. Inflation this year will rise by 5 per cent, up from 3.2 per cent forecast previously, and the trade surplus will widen to about US$250 billion this year, from US$177.5 billion in 2006.

The forecasts puts pressure on People's Bank of China governor Zhou Xiaochuan to raise lending and deposit rates for the sixth time this year to cap surging asset prices and cool the overheating economy. The bank on Thursday raised interest rates on some home mortgages and increased minimum down payments in an effort to cool property prices gains.

The government is concerned that a surge in lending is creating a bubble, which would drive up bad loans should it collapse. Investment in real-estate development jumped 29 per cent in the first eight months of this year. The statement also said the maximum mortgage for commercial property is half of its value, and the term can't exceed 10 years.

The decision by the central bank and the China Banking Regulatory Commission is 'to prevent credit risks and protect the borrower's repayment ability', according to the statement on the People's Bank of China website.

'It's clear they know they're behind the curve, in a hole, at risk of people taking more of their money out of bank deposits and going into other assets where there is already frothiness,' said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington.

Until now, banks were barred from charging less than 90 per cent of the benchmark rates for mortgages. Interest rates on loans for first homes are unchanged.

China raised its one-year lending rate for the fifth time this year on Sept 14, to 7.29 per cent. Those increases have failed to damp demand for property as China's economic growth raises incomes and people prefer fixed assets amid inflation at a 10-year high of 6.5 per cent.

China's economy, the world's fourth largest, expanded 11.9 per cent in the second quarter from a year earlier, the fastest pace in more than 12 years.

The World Bank on Sept 12 raised its 2007 China growth forecast to 11.3 per cent from a May forecast of 10.4 per cent. -- Bloomberg