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2011-03-24 | All chapters

China PBOC's Yi urges caution on interest rate rises
Reuters, 23rd March 2011

China is facing strong inflationary pressure, but will tread cautiously in raising interest rates, said Yi Gang, a deputy governor with the People's Bank of China.

Yi told a business conference in Hong Kong on Wednesday that he was confident the government would be able to keep annual average consumer price inflation to 4 percent this year.

"We will see high (inflation) numbers in the first half of the year because of the base effect. Inflation in the second half will be lower," Yi said. "So for the whole year, we will be able to meet the 4 percent goal."

Chinese inflation topped expectations at 4.9 percent in the year to February, near its fastest level in more than two years, and looks set to accelerate further in coming months as the economy races ahead and prices of food and commodities such as oil remain high.

The deputy central bank chief said he was "comfortable" with current interest rate levels, adding that raising them too high would attract hot money inflows.

"I think they (interest rates) are now at a comfortable level. In a mid-term time horizon, we will maintain a positive interest rate," Yi said.

"And also you know that higher interest rates will attract more hot money into China, so that is another consideration."

Chinese officials fear rising speculative inflows, lured by widening interest rate differentials and expectations of a firmer yuan, could complicate their fight against inflation.

So far, the central bank has relied mainly on quantitative tightening measures, notably hiking banks' reserve requirements, to mop up excessive liquidity in the economy.

It has raised interest rates three times and bank reserve requirements six times since October, most recently on March 18. The government has also used a series of direct controls to cap price rises.

China's monetary policy has become tighter compared to the previous two years but the policy is not tight at all if measured by the historical norm, Yi added.

The yuan has been allowed to rise about 4 percent since it was depegged from the U.S. dollar last June, but has gained just 0.5 percent so far this year.

Lian Ping, the chief economist at Bank of Communications, said in an article published by the official China Securities Journal that now is a good time for China to let the yuan rise faster because China's economy is expanding steadily while the global economy still faces difficulties.

In a sign of growing optimism that the government may let the yuan rise further this year, Yang Jianlong, an economist at the cabinet's Development Research Centre of the State Council, forecast on Wednesday that the yuan could rise at least 5 percent in the year.

"A 5-percent rise will be the bottom line for yuan appreciation this year, while the upward limit will be higher," Yang told a forum in Beijing.