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China needs to raise rates to cap inflation

(Agencies)
Updated: 2008-02-14 10:27

China needs to raise interest rates to curb inflation and let the yuan rise gradually, Fan Gang, an adviser to the central bank, said in remarks published on Thursday.

Steps by Washington to boost the US economy would increase pressure on the yuan to rise and may boost hot money inflows into China, Fan told the People's Daily.

He said China's macroeconomic controls should be responsive to changing conditions both at home and abroad. As such, a tight monetary policy was still needed to curb inflation and prevent the economy from overheating.

"Currently our country's interest rates are relatively low and consumer prices are relatively high. Some short-term deposit rates are still negative in real terms. From this perspective, there is still pressure in the economy to raise interest rates," Fan said.

The central bank last year raised interest rates six times and increased banks' reserve requirements 10 times.

Related readings:  Interest rate hikes won't quell property appetite  PBOC rules out imminent interest rate hike  Yuan gains vs greenback after US interest rate cut  5th interest rate hike to drain excessive liquidity

But deposit rates still lag inflation, which was 6.5 percent in December. Economists expect the rate in January to have surpassed the 11-year high of 6.9 percent hit in November.

However, Fan said China also needed to take account of recent deep cuts in US interest rates; otherwise, more international speculative money would flow into China.

The constant weakening of the dollar made it impossible to carry out a one-off revaluation of the yuan to a balanced level, Fan said, adding that big swings in the value of the currency would entail serious risks for China's financial system.

"Personally, I prefer letting the yuan rise in a gradual and controllable manner in line with growth of the economy," he said.

Fan said the central bank would continue to use reserve requirements, interest rates, the exchange rate, open market operations and window guidance to achieve its monetary targets. But he did not elaborate.

"Policy makers need to make a proper decision in light of varying circumstances whether to use quantitative measures more frequently and rely less on raising interest rates," he said.

Fan also said the US subprime crisis was far from having played out and might eventually ripple through China.

However, he said US stimulus policies would help to avoid a recession and China could cushion the impact of a slowdown by exporting more to other parts of the world such as Asia-Pacific nations and oil-producing countries.