China increased the reserve ratio for banks and the threat of price controls on essential items may be insufficient to control inflation, and the central bank will have to raise interest rates, economists said.
People's Bank of China yesterday ordered a 50 basis point increase in the amount of money lenders must set aside after two days of the cabinet announced measures to fight inflation. A basis point is 0.01 percentage point.
Stocks and oil fell in the central bank's announcement, noting the concern that China's efforts to cool faster rise of the nation in consumer prices in two years may cause a build to fail. Analysts surveyed nine banks this week by News predicted the central bank will add to rate rise last month, the first since 2007 year-end.
"Monetary policy is tightening, as it should, and a rise in rates will sooner rather than later," said Shen Jianguang, an economist at Hong Kong, Mizuho Securities Asia Ltd., formerly worked for the International Monetary Fund and the European Central Bank. The next step "inevitably" be in rates, said Shen.
benchmark stock index in China has had its biggest drop in two weeks of May amid concern that monetary tightening that hinder spending on the fastest growing economy. The Standard & Poor's 500 Index and the MSCI World index fell after the announcement yesterday. The Shanghai Composite Index closed at the beginning of 0.8 percent, comparing its weekly decline of 3.2 percent.
Wen meeting
Concern that rising consumer prices will undermine the economy prompted Premier Wen Jiabao, to hold a cabinet meeting on the issue this week. The measures provided for in the range of the Council of State of a crackdown on speculation in agricultural products to the imposition of price caps for "daily use" if needed.
The meeting came amid growing concern over threatened food prices pose to the poorest people in the world's most populous country. More than 81 million people in the disaster-affected areas need government food aid this winter, the Ministry of Civil Affairs on its website on 18 November.
Societe Generale, Hong Kong, an economist Yao Wei, said this week that China "old price stabilization policies" will not be sufficient to reduce in the case of monetary tightening. The possibility of "further interest rate hikes by year-end is still relatively high," he said.
The control of loans
The increase in reserve requirements of banks, from November 29, announced the second in two weeks. The aim is to strengthen liquidity management and "adequate control" of credit and loans, the central bank said on its website.
China, the inflation rate reached 4.4 percent in October, exceeding economists' forecasts. Standard Chartered Plc analysts yesterday raised its forecast for consumer price index next year to an average of 5.5 percent, from about 3.2 percent by 2010.
While the costs of vegetables have helped drive inflation higher than China this year, officials should use tools such as interest rates to "prevent food inflation is spreading to the broader economy," said Wang Tao , Beijing-based economist for UBS AG. said yesterday.
Money inflows trade surplus, foreign direct investment, and investors on the earnings of bets on the yuan are threatening to push prices to the consumer after the unprecedented lending by banks flooded the economy with cash from the end of 2008.
Rents, labor costs
Standard Chartered, HSBC Holdings Plc, BNP Paribas, Citigroup Inc., Credit Suisse Group AG, Mizuho, Royal Bank of Canada, UBS, and Australia and New Zealand Banking Group Ltd. predicted that the central bank will join this year's quarter - raises the point that took the benchmark interest rate from one year to 5.56 percent and the rate of one-year deposits to 2.5 percent.
"Inflation is showing in most foods, obviously, but also rents, wages in the service sector, and non-food products, analysts such as Stephen Green, director of research for Greater China for Standard Chartered, wrote in A report yesterday. The bank expected to increase the rate of 31 December and three others on June 30.
In Asia, inflation in China compared with deflation in Japan and in the other end, a rate of 9.8 percent in India. In the U.S., consumer prices rose 1.2 percent last month from a year earlier.
In addition to the maximum price possible, the State Council plans to control prices include the sale of state reserves of food.
"The price intervention would be counterproductive because it can cause panic and worsen inflation expectations," said Liu Li, Gang, an economist at Hong Kong to Australia and New Zealand who previously worked in the Hong Kong Monetary Authority and the World Bank.
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