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China advised to take cautious tightening measures in H2
By Leo Zhang |
May 24, 2010, Monday
|
Online Edition
Online Edition
CHINA should take an extremely cautious approach in adopting new austerity moves in the second half as the country's economy faces big internal and external uncertainties, officials and analysts said.
Many observers noted the central bank may introduce at most one interest-rate hike through the year end and allow the yuan to rise by a smaller-than-expected clip to ensure sustainable recovery.
They also believed that worries over a double-dip recession has already exceeded those about economic overheating as the European debt crisis spreads and domestic investment eases.
"The dramatic changes in policies are set to cast a negative impact on the sustainable performance of the economy," said Xu Lianzhong, a senior official with the National Development and Reform Commission, China's top economic planner.
"The country still faces weak private investment and uncertainties in domestic consumption and exports," he said in an article published today in the official China Securities Journal.
China has taken actions this year to limit credit to speculators in the housing market, punish land-hoarding developers and hike the reserves banks must park with the central bank as it acts to rein in overheating.
However, the recent debt crisis in Greece and slower growth in domestic industrial output and fixed-asset investment have stoked up jitters that further tightening may have more side-effects on economic growth.
"The market is quite sensitive about policy adjustments, especially when the European debt crisis is spreading," Xu said, adding inflation was not a major risk to the economy.
China's consumer prices increased 2.8 percent last month, the fastest pace in 18 months. It has been above the benchmark one-year deposit rate of 2.25 percent for three straight months.
The price hike was largely due to a low base in the same period last year and driven by a jump in food costs, economists said. The NDRC said last week that price growth may average 3 percent in May and June.
Economists at Soochow Securities expected that growth of consumer prices may peak at 4.2 percent in July before easing to less than 3 percent towards the end of this year.
They noted that an interest-rate hike of 27 percentage points, probably in July, will help ease inflationary expectations, helping the central government to reach the annual target of 3 percent for consumer price growth.
Zhang Jing, an analyst with Huatai United Securities, predicted that the central bank may raise interest rates after first-half economic data are unveiled in July as a response to the expected strong economic growth.
"However, if no rate hike occurs at that time, it shows authorities are pessimistic about economic growth and no further tightening would be expected," Zhang said.
The monetary authority will likely raise the benchmark deposit rate by a bigger amount than the lending rate to both curb inflation and ease the move's impact on corporate borrowing expenditures, Zhang added.
As the external economic scenario grows murky, a fast appreciation of the yuan will likely hurt exporters and beef up capital inflows, which could destabilize the domestic economy, analysts said.
"It's reasonable for the central government to increase the yuan's trading band or peg it to a basket of currencies instead of to the US dollar in the coming weeks," said Wu Ke, a Zhongtian Investment Consulting Co analyst.
"But a rise of more than 5 percent in the yuan's value is something unlikely to happen if the European economy stays weak," Wu said.
Standard Chartered Bank also said today that China may wait until the third quarter to resume the yuan's appreciation due to the ongoing financial market turmoil.
The bank said that the delay was caused by financial-market volatility and deteriorating sentiment toward the global recovery, and the recent sharp appreciation of the yuan real effective exchange rate.
Europe's debt crisis had led to an accelerated rally in the yuan's real effective exchange rate, with yuan rising about 7 percent against the euro since 19 April, according to Standard Chartered.
China needs to wait for some stabilization in global markets and see a sustained trade surplus to justify a yuan de-pegging, the bank said.
Many observers noted the central bank may introduce at most one interest-rate hike through the year end and allow the yuan to rise by a smaller-than-expected clip to ensure sustainable recovery.
They also believed that worries over a double-dip recession has already exceeded those about economic overheating as the European debt crisis spreads and domestic investment eases.
"The dramatic changes in policies are set to cast a negative impact on the sustainable performance of the economy," said Xu Lianzhong, a senior official with the National Development and Reform Commission, China's top economic planner.
"The country still faces weak private investment and uncertainties in domestic consumption and exports," he said in an article published today in the official China Securities Journal.
China has taken actions this year to limit credit to speculators in the housing market, punish land-hoarding developers and hike the reserves banks must park with the central bank as it acts to rein in overheating.
However, the recent debt crisis in Greece and slower growth in domestic industrial output and fixed-asset investment have stoked up jitters that further tightening may have more side-effects on economic growth.
"The market is quite sensitive about policy adjustments, especially when the European debt crisis is spreading," Xu said, adding inflation was not a major risk to the economy.
China's consumer prices increased 2.8 percent last month, the fastest pace in 18 months. It has been above the benchmark one-year deposit rate of 2.25 percent for three straight months.
The price hike was largely due to a low base in the same period last year and driven by a jump in food costs, economists said. The NDRC said last week that price growth may average 3 percent in May and June.
Economists at Soochow Securities expected that growth of consumer prices may peak at 4.2 percent in July before easing to less than 3 percent towards the end of this year.
They noted that an interest-rate hike of 27 percentage points, probably in July, will help ease inflationary expectations, helping the central government to reach the annual target of 3 percent for consumer price growth.
Zhang Jing, an analyst with Huatai United Securities, predicted that the central bank may raise interest rates after first-half economic data are unveiled in July as a response to the expected strong economic growth.
"However, if no rate hike occurs at that time, it shows authorities are pessimistic about economic growth and no further tightening would be expected," Zhang said.
The monetary authority will likely raise the benchmark deposit rate by a bigger amount than the lending rate to both curb inflation and ease the move's impact on corporate borrowing expenditures, Zhang added.
As the external economic scenario grows murky, a fast appreciation of the yuan will likely hurt exporters and beef up capital inflows, which could destabilize the domestic economy, analysts said.
"It's reasonable for the central government to increase the yuan's trading band or peg it to a basket of currencies instead of to the US dollar in the coming weeks," said Wu Ke, a Zhongtian Investment Consulting Co analyst.
"But a rise of more than 5 percent in the yuan's value is something unlikely to happen if the European economy stays weak," Wu said.
Standard Chartered Bank also said today that China may wait until the third quarter to resume the yuan's appreciation due to the ongoing financial market turmoil.
The bank said that the delay was caused by financial-market volatility and deteriorating sentiment toward the global recovery, and the recent sharp appreciation of the yuan real effective exchange rate.
Europe's debt crisis had led to an accelerated rally in the yuan's real effective exchange rate, with yuan rising about 7 percent against the euro since 19 April, according to Standard Chartered.
China needs to wait for some stabilization in global markets and see a sustained trade surplus to justify a yuan de-pegging, the bank said.
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