China should raise rates soon to curb inflation

by IBT

China should raise benchmark interest rates soon to tame inflation and accelerate economic restructuring, even though the move could slow growth, the official China Securities Journal said in an editorial published on Thursday.

The central bank has relied more on rises in reserve requirement ratios than interest rate increases so far this year to check inflation.

China's real interest rates had been negative for too long, fuelling money flows outside the banking system, weakening the effectiveness of quantitative easing tools such as required reserve ratio increases or lending curbs, the newspaper said.

For example, although interbank money market rates had jumped and growth of new lending and money supply had slowed in June, according to official data, loan demand remained robust as many enterprises turned to non-banking financial institutions for financing, the article said.

In addition, China's inflation was largely driven by its booming real estate market, which had pushed up prices of labour and raw materials, and interest rates were typically necessary in such a scenario, it said.

If China did not raise interest rates now, the momentum of higher inflation could accumulate while the task of transforming the model of economic growth would become more difficult, the paper said.

Separately, He Keng, a senior lawmaker, told the People's Daily that the central bank should suspend raising bank reserve requirements as it had failed to contain inflation.

The central bank has raised reserve ratios six times so far this year but has only increased interest rates twice. 

Its latest move last week sparked an acute money market squeeze, forcing it to suspend bill issues on Thursday.

More RRR rises could threaten economic growth in the world's second-largest economy, He warned.

"The six rises have caused big funding difficulties for small and medium-sized companies. We are also hearing big companies complain about tight capital. If such adjustment continues, our economy will be in trouble," he said, reminding that excessive RRR rises and yuan appreciation sharply slowed the Chinese economy in 2008.

"What's the point of relentlessly raising RRRs regardless of economic conditions and corporate difficulties?" 

He said.

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