May witnesses higher ex-factory prices
By Xu Dashan (China Daily)
Updated: 2004-06-15 09:09

The ex-factory price of China's industrial products, a guide to trends in consumer prices, rose 5.7 per cent in May compared to the same month last year, according to the National Bureau of Statistics.

The ex-factory price, measured at the factory gate, was 0.7 percentage point higher than the previous month, suggesting that there still exists the possibility of a rise in the renminbi's interest rate.

Qi Jingmei, a senior economist with the State Information Centre, said the ex-factory prices of industrial products, as well as purchasing prices for raw materials, fuel and energy are important indicators for the future consumer price index (CPI), the policy-makers' key inflation measurement.

"Roughly, higher producer prices will translate into higher consumer prices," she said.

China's CPI rose a year-on-year 4.4 per cent in May and 3.8 per cent in April.

"But a higher CPI does not necessarily mean higher inflation," Qi said.

On the contrary, figures in May suggest the central government's measures to cool down the economy are taking effect, she said.

The growth in both industrial output and money supply dropped 1.6 percentage points in May compared with the previous month, she said.

However, the central bank may still possibly raise the renminbi's interest rate, Qi said.

A media report said a central bank plan to raise the renminbi's interest rate has been submitted to the State Council for approval.

Officials from the People's Bank of China were not available for comment.

But Governor Zhou Xiaochuan was quoted as saying the central bank would follow the CPI movement closely.

The government would have to monitor prices before making any decision on raising the renminbi's interest rate, he said.

"If the inflation rate keeps on going up, leading to an actual negative lending rate, the central bank would consider raising lending interest rates from the current 5.3 per cent," he said.

If the CPI growth caused a negative lending rate, which would enables corporations to make money even after they pay back principle and interest, the central bank will consider raising interest rates, he said.

A negative lending rate would enable corporations to store raw materials, and thus drive the inflation rate further up.

Zhu Jianfang, an economist at China Securities, said if the CPI continued at more than 3 per cent in the next few months, there would be a possibility of raising the interest rate.

"The central bank is likely to raise the renminbi's interest rate in the third quarter," he said.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the government should have already raised the interest rate to deal with increasing inflationary pressure.

Presently, the benchmark one-year bank deposit rate is set at 1.98 per cent.

People were losing out when they put their money into banks because of low interest rates, he said.

Lower interest rates would also have an impact on people's consumption behavior, he said.

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