Slim majority see China rate rise before end 2010-Reuters poll

By Aileen Wang and Simon Rabinovitch

BEIJING, Dec 13 (BestGrowthStock) – China is poised to raise
interest rates before the end of this year, but will then
increase them just twice more in 2011, relying instead on
using lending controls as its weapon of choice in the fight
against inflation, a Reuters poll shows.

The 26 economists contacted over the past three days
revealed an emerging consensus that Beijing will try to get
away with a milder course of policy tightening than many in
the market had assumed it would implement.

All of the economists said that China would raise rates in
the coming few months.

A narrow majority of 55 percent said an increase of 25
basis points was likely before the end of 2010, while the
remaining 45 percent saw the next rate rise in the first
quarter of 2011.

One-year benchmark deposit rates currently stand at 2.5
percent, putting real rates well into negative territory after
consumer inflation sped to a 28-month high of 5.1 percent in
the year to November.

The median forecast was for the Chinese central bank to
raise deposit rates 75 basis points to 3.25 percent by the
midpoint of 2011.

“Consumer price inflation is going to be about 3 percent
in the medium to long term, so it is quite necessary for
deposit rate to follow that and return to the 3 percent
level,” Wang Han, an economist at CEBM in Shanghai, said.

One-year lending rates were seen following deposit rates
in lock-step. Currently 5.56 percent, they will rise to 6.31
percent around the middle of next year, the poll suggests.

LENDING CONTROLS, RESERVE REQUIREMENTS

China has raised interest rates just once over the past
year, but has officially increased banks’ required reserves
six times, preferring to use this quantitative control as a
way of limiting the amount of cash in the economy.

The median forecast was for another three reserve
requirement increases by the end of next year. But none of the
economists in the poll thought these alone would be sufficient.

“Any reluctance to avoid using more potent policy tools
looks increasingly untenable given the speed with which price
pressures are building,” said Brian Jackson, an economist with
Royal Bank of Canada in Hong Kong.

But rather than relying on interest rates alone, China
will weigh on its state-owned banking system, an essential arm
of its monetary policy, to cap the flow of credit into the
economy.

Beijing will order banks to restrict new loans to 7
trillion yuan next year, down about 7 percent from this year’s
credit target, according to the median forecast.

Chinese leaders gave greater prominence to the fight
against inflation in their statement on Sunday at the end of
the Central Economic Work Conference, an annual meeting at
which they chart policy for the coming year. [ID:nTOE6BB00G]

But at the same time as vowing to focus on price
stability, they also said that they will strike a balance
between controlling inflation and maintaining growth. Some
analysts have read this as relatively soft language,
indicating that officials believe inflation is under control
and harsh tightening will not be necessary.

Slim majority see China rate rise before end 2010-Reuters poll