Wen’s Inflation Tiger May Find Cage Closing as Rates Rise
April 05, 2011, 11:55 PM EDTBy Bloomberg News
(Updates by adding gain in Shanghai Composite Index in sixth paragraph.)
April 6 (Bloomberg) -- China’s fourth interest-rate increase in less than six months signaled the government’s determination to “front-load” monetary tightening in an effort to defuse overheating risks.
The People’s Bank of China yesterday boosted its benchmark one-year lending rate by a quarter point to 6.31 percent, making its announcement at the end of a three-day holiday. The timing came as a surprise to banks from Credit Suisse AG to Bank of America-Merrill Lynch that had said the central bank may pause in increases amid rising risks to global growth.
Premier Wen Jiabao’s government acted ahead of a report forecast to show consumer prices climbed 5.2 percent last month from a year before, the fastest pace since 2008. Inflation may drop “sharply” in the second half of the year on moderating economic growth, smaller increases in food costs and favorable year-earlier bases for comparison, economist Mark Williams said.
“The pressure to continue raising rates is falling,” said Williams, who previously advised the U.K. Treasury on China and is now at Capital Economics Ltd. in London. “The timing of this move was a small surprise given that the tone of policy statements in recent weeks had tended to be a bit more dovish.”
Crude oil, copper and global stocks dipped yesterday as the announcement stoked concern that tightening will restrain demand in the fastest-growing major economy.
Chinese Stocks
The MSCI Asia Pacific index of stocks retreated 0.4 percent as of 11:21 a.m. Hong Kong time today amid speculation that a withdrawal of U.S. stimulus may also curb global growth. In China, investors indicated little concern, with the Shanghai Composite Index up 0.7 percent.
Policy makers have given mixed signals on their preparedness for a rate move. PBOC Deputy Governor Yi Gang said March 23 that interest rates were at a “comfortable” level and he was “not too worried” by inflation because price increases will slow in the second half of the year.
By contrast, Premier Wen used stronger language at a meeting of lawmakers in Beijing last month, saying inflation was a “tiger” that once freed can be difficult to get back in its cage. He also said that “exorbitant” home-price increases in some cities were a top public concern and rising costs may undermine social stability.
Inflation Forecast
Consumer prices jumped 4.9 percent in February from a year earlier, topping the government’s full-year target of 4 percent.
The median estimate in a Bloomberg News survey of nine economists is for March inflation of 5.2 percent. The statistics bureau will release the number on April 15, according to a preliminary schedule.
While faster currency gains could limit inflation by reducing the cost of imports, Qu Hongbin, chief economist for China at HSBC Holdings Plc, said yesterday that a policy of “gradual” appreciation likely remains intact. The Chinese currency, seen by the U.S. as “substantially undervalued,” gained 4 percent against the dollar in the past year and touched 6.5449 today, the strongest level since 1993.
Emerging markets have led global rate increases, while the largest developed nations have yet to start. The European Central Bank may begin tomorrow, with the median forecast in a Bloomberg News survey for a quarter point move to 1.25 percent. The Federal Reserve has yet to end its policy pledge of keeping borrowing costs near zero for an “extended period.”
‘Bigger Lesson’
“China will be the first central bank to get to the point where they can ease, but that’s not yet,” said Kit Juckes, head of foreign-exchange research in London at Societe Generale SA. “The bigger lesson is for the rest of the region -- get on with tightening,” he said, recommending investors buy South Korea’s won and Singapore’s dollar.
Vietnam, Taiwan, India, South Korea and Thailand all boosted benchmarks in March or April and Chinese officials have drained cash from their economy this year by raising bank reserve requirements.
In China, the key lending rate will rise to 6.56 percent by year-end, with the deposit rate climbing to 3.5 percent, according to the median forecast in a Bloomberg News survey of economists on March 22. That suggests another 0.25 percentage point increase in each.
Besides monetary tools, the government has deployed subsidies, state food reserves and the threat of price controls to counter inflation. Unilever NV, the world’s second-largest consumer-goods maker, has postponed planned price increases at the government’s request.
Asset Bubbles
The benchmark one-year deposit rate has lagged behind the pace of consumer-price gains, an incentive for households to switch savings to asset markets, increasing the risk of bubbles in the real-estate market.
Tao Dong, chief economist for non-Japan Asia at Credit Suisse Group AG in Hong Kong, sees policy makers failing to contain inflation without a sustained series of further increases in borrowing costs.
The central bank “may have a brief period of policy pause, but such a pause, if any, would be a short-lived one,” Tao wrote in a note today. He predicted the PBOC will boost the one- year lending rate by 1.35 percentage points, to 7.66 percent, and the one-year deposit rate by 1.50 points to 4.75 percent this year.
Meantime, Chinese officials may need to be on guard against increased inflows of “hot money,” or speculative capital, as yesterday’s move widens the differential with rates in developed economies. The nation may face “relatively large” risks from cross-border capital flows, according to Deng Xianhong, deputy director of the State Administration of Foreign Exchange.
‘Moderate Slowdown’
Increasing rates may signal the government’s confidence in the strength of an economy forecast by the World Bank to expand 9 percent this year. A purchasing managers’ index released April 1 indicated that the world’s second-biggest economy is “growing smoothly, with a very moderate slowdown,” Bank of America-Merrill Lynch economist Lu Ting said that day.
The Asian Development Bank sees little risk of a hard landing for the Chinese economy, country director Paul J. Heytens said at a briefing in Beijing today.
JPMorgan Chase & Co. analysts see 9.4 percent economic growth this year, with “worries about overheating” receding as policy tightening is “front-loaded” in the first half of 2011.
--Marco Lui in Hong Kong, Zheng Lifei in Beijing. With assistance from Chris Anstey, Ed Lococo, Jay Wang and Sandy Hendry. Editors: Paul Panckhurst, Chris Anstey
To contact Bloomberg News staff for this story: Lifei Zheng in Beijing at lzheng32@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net
