Interest rate rise not likely in short term
(Xinhua)
Updated: 2004-07-04 21:49

The People's Bank of China, the country's central bank, is not likely to raise its interest rate in the short term, an official with the State Council's Development Research Center has (DRC) said.

Ba Shusong, deputy head of the finance research institute of the DRC, said the interest rate increase by the central bank depends on the development trend of macro economy of China.

Li Yang, a member of the Monetary Policy Committee of the central bank and head of the finance research institute of the Chinese Academy of Social Sciences (CASS), has said the economic situation, supply and demand of funds, and the difference between the interest rates of the United States and China are the three major factors that decide whether it is necessary to raise the interest rate in China this year.

Debates over the interest adjustment have never stopped since the central government of China launched a new round of macro-control policies early this year. Suspicions of an interest rate increase have accelerated following the US Federal Reserve's raising the short-term interest rate by a one-quarter percentage point Wednesday, the first rate increase in four years.

In terms of macro economic situation, it is necessary to increase the interest rate, said Li. However, it was not sure whether the current price hikes in China would continue in the future and, a price decrease was expected as early as in the second half of this year, or as late as in the first half of next year, Li said, adding that if the price hike continues, it would be a spent bullet.

Viewing the supply and demand of funds, China currently boasts sufficient money supply and this trend does not support increase in interest rate, Li noted.

Li's view was echoed by many financial experts.

Wang Guogang, deputy head of the finance research institute of the CASS, said China's special market environment and conditions have decided that the rate increase will not result in any obvious effect. "So, it is not necessary to take such a step," Wang stressed.

Yi Xianrong, a research fellow with the finance research institute of the CASS, said that rate increase is expected to prevent investment expansion in certain industries and hold back price hikes, but it is likely to result in increase in cost in the investment sphere, which is a bad news for small and medium-sized enterprises.

Yi noted a short-term rate increase could also restrain consumption, weaken the driving forces behind China's economic growth and might lead to a down-turn in share prices.

But some experts held that a rate increase is inevitable in China in the medium and longer period of time.

Ba Shusong, the official with the State Council's Development Research Center, said that the US rate increase, the first in fouryears, indicated a new round of rate increase period, driven by the robust pick-up of the US economy.

The corresponding situation in China is a low RMB interest rate and that is likely to increase in view of the development trend, said Ba.

Since 1996, China's central bank has cut interest rates eight times in a bid to maintain sustained, healthy and fast economic growth.

China has set a target of 7 percent for 2004's economic growth, but the first-quarter increase, driven largely by investment, soared 9.8 percent.

Earlier reports say China's economy is gradually beginning to show signs of a soft landing, responding to repeated attempts by the Chinese government to tap the brakes on excess investment.

Official figures say investment in construction and factory equipment, contributing greatly to the country's overheating economy, slowed its pace -- down 8.8 percentage points from March to an annualized growth of 34.7 percent in April.

The increase of investment in property was declining apparently in tandem with the slower growth of bank lending, while construction of new projects was initially reined in, according to the National Bureau of Statistics.

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