Nov. 25 (Bloomberg) -- The People’s Bank of China said it will strengthen liquidity management and “normalize” monetary conditions, reinforcing forecasts for higher interest rates to combat the highest inflation rate in two years.
The nation will use quantitative and price tools to manage liquidity, Hu Xiaolian, a central bank deputy governor, said in a statement on the bank’s website yesterday. PBOC adviser Xia Bin said at a conference in Shanghai today that both higher rates and bank reserve ratios may be needed to control liquidity.
The comments reflect the concern in Premier Wen Jiabao’s government that inflation, which reached 4.4 percent last month, risks destabilizing the economy. China has raised rates, told banks to hold more funds in reserve and pledged price controls if needed. Xia also suggested, in an opinion piece published today, a tax on currency trading to slow capital inflows.
"We expect them to accelerate monetary tightening,” with another rate move coming as soon as this weekend, said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong. Inflation may climb to 5 percent in the second quarter of 2011 and “such strong price pressures would be unacceptable to the PBOC,” he said.
Kowalczyk added that policy makers may allow a faster pace of gains in the exchange rate to reduce inflationary pressures from imports.
Yuan Rises
The yuan appreciated 0.06 percent to 6.6501 per dollar as of 12:27 p.m. in Shanghai, after retreating 0.31 percent in the last four days, according to the China Foreign Exchange Trade System. Wen’s government has kept gains to less than 3 percent since pledging greater flexibility in June.
Policy makers are coping with the legacy of the record credit expansion unleashed last year to safeguard the economy from the global recession. China aims to control the pace of bank lending through year-end as it will be difficult to stay within the government’s 7.5 trillion yuan ($1.1 trillion) target for new loans in 2010, Deputy Governor Hu said.
Authorities will allow for no more than 300 billion yuan in excess of the lending cap for this year, Caijing reported online today, citing an unidentified person close to regulators. Officials are likely to impose a limit of 6 trillion to 6.5 trillion yuan for next year, Credit Suisse AG analysts wrote in a report.
Rate Outlook
Economists at nine banks surveyed by Bloomberg News last week predicted the PBOC will raise the benchmark one-year deposit and lending rates by year-end, from the current levels of 5.56 percent and 2.5 percent.
Rising wages, higher commodities prices and abundant liquidity are adding to inflation expectations in China, Hu said. Pressure on prices is also rising as the country attracts capital because of increasing expectations for yuan appreciation, she said.
China’s current-account surplus doubled in the third quarter from a year earlier to $102.3 billion as the nation’s exports recovered from the global crisis, State Administration of Foreign Exchange figures showed today.
Xia, writing in the China Dealmaker magazine, said China should consider imposing a so-called Tobin tax on short-term capital, reiterating officials’ concern that the U.S. Federal Reserve’s bond-purchase program will fuel “hot money” flows of speculative funds.
Bubble Concern
PBOC Governor Zhou Xiaochuan said last week that loose policies in developed economies may spark inflows of cash to China, fueling concern about asset-price bubbles.
Overall credit growth should be curtailed to 15 percent next year from an estimated 18.8 percent this year, Xia said today in Shanghai. The central bank had cut financial institutions’ total loan quota target to 7.5 trillion yuan this year, from an unprecedented 9.59 trillion yuan in 2009.
"The key task of monetary policy currently is to strengthen liquidity management, which is also a main way of normalizing monetary conditions,” Hu from the central bank said.
The 21st Century Business Herald reported Nov. 23 that China’s banks had already extended 600 billion yuan of loans this month. That would indicate the annual target would be reached by the end of November.
Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and Agricultural Bank of China Ltd. are only extending new loans as existing ones get repaid, according to four people with knowledge of the matter.
Food Costs
The 4.4 percent increase in consumer prices in October from a year earlier was driven by a 10 percent surge in food costs, according to government statistics. Inflation this year may exceed the government’s 3 percent target for 2010, Zhang Ping, head of the top economic planning agency, said this month. November’s inflation figure is due to be released on Dec. 13.
China may set a higher inflation target of 4 percent next year and decide to tighten its monetary policy stance at the government’s annual economic-work meeting at the end of this year, the China Business News newspaper reported yesterday, citing an unidentified person who has been involved in consultations on the policy.
Higher prices for food and services are prompting economists to raise their forecasts for inflation next year. Standard Chartered lifted its estimate last week to 5.5 percent from 4 percent, and UBS AG said Nov. 19 consumer prices will rise as much as 4.5 percent, compared with its previous range of 3.5 percent to 4 percent. Bank of America-Merrill Lynch revised its estimate to 4.5 percent from 3.6 percent.
"We expect some harsh administrative measures” such as selective increases in reserve requirements for some banks to rein in liquidity, Lu Ting, a Hong Kong-based economist at Merrill Lynch said.
The central bank has already raised the reserve requirement ratio for the nation’s lenders twice this month by a total of 100 basis points. The increase takes the ratio for the nation’s biggest banks to 18 percent, according to data compiled by Bloomberg.
