Friday, September 10, 2004

Anyway, we are back debating whether China will raise interest rates again. I attach an excellent NYT piece on this issue. Essentially, I agree with the assessment of the article. I think raising lending interesting now is politically much more feasible. First of all, real lending interest is virtually zero. More important, with the Feds raising interest rates already, there is less pressure from hot money if interest rates were raised in China. It is unlikely that Wen will raise deposit interest rate because he wants to continue consumer spending momentum. Also, the State Council doesn't want to harm the profits of the Big Four too much, especially with restructuring and public offering on the horizon.

Business/Financial Desk; SECTW
China Poised For Decision On Raising Interest Rates
By KEITH BRADSHER 1,038 words 9 September 2004The New York TimesLate Edition -

Final1English(c) 2004 New York Times Company

HONG KONG, Sept. 8 -- With a slew of important economic statistics due for release in the next several days, China's central bank is in the final stages of deciding on what could be the country's first increase in interest rates in nine years, economists and government-controlled media said on Wednesday.
China faces rising inflation and signs that speculative investments have increased steeply in the last few weeks. Since last spring, Beijing has been trying to rein in many building projects, especially those financed with loans obtained by dubious means from government-owned banks and proceeding without zoning or environmental approvals.
Numerous reports in the government-controlled media have said that the central bank, the People's Bank of China, has already decided to raise the benchmark rate for one-year corporate loans at the end of the month. Senior bank officials denied the reports on Wednesday.
''There is no such thing -- the central bank has not issued anything like that and the reports have completely no basis,'' said Yi Gang, the bank's monetary policy director.
The official New China News Agency reported on Wednesday that Zhou Xiaochuan, the governor of the central bank, had said that a decision would have to wait for the release of economic statistics for August, expected in the next few days.
The one-year lending rate, which stands at 5.31 percent, is used as the base for calculating interest rates for a variety of corporate loans.
Expectations that a rate increase could come soon were fed by a report on Tuesday in Securities Market Weekly, an official newspaper controlled by the China Securities Regulatory Commission, China's version of the Securities and Exchange Commission.
Citing an unidentified official at a big commercial bank, the report said that the one-year rate would be raised to 5.76 percent during the weeklong National Day holiday at the start of October. Bank deposit rates, also regulated, would not rise, the report said.
Frank Gong, an economist with J.P. Morgan, said in a research report on Wednesday morning that rates would rise. ''We believe the debate on the rate hike is closing, and the first rate hike is expected in late September,'' he said.
Mr. Gong said that the People's Bank of China was likely to act only after the Federal Reserve's Open Market Committee meets on Sept. 21 and decides whether to raise short-term interest rates in the United States.
An American increase would make an increase in China more likely because the yuan is pegged to the dollar.
China's consumer price index has risen 5.3 percent in the year through July, meaning that a company that borrowed money at 5.31 percent a year earlier could pay it back essentially without interest, after adjusting for inflation.
But even that situation understates the incentive for companies to borrow heavily and to plow the money into investments or stockpiles of raw materials in short supply. The government regulates prices for many consumer goods and services, to avoid upsetting the public, and this has held down increases in the consumer price index.
Industrial prices are less regulated, however, and those climbed 14 percent in the first seven months of the year.
That figure is a better indicator of the business conditions facing companies, and a sign that China's interest rates have actually been deeply negative.
Still, there have been a few signs that administrative measures, like restrictions on bank loans, have slowed the economy somewhat in the last few months.
Industrial output climbed 15.5 percent in July compared with a year earlier, down from a peak of 23 percent growth in February. An official at the National Bureau of Statistics said that the industrial production figure for August should be released on Friday, and the consumer price index for August should come out on Monday.
The People's Bank of China had been expected to release the August figures for money supply and domestic credit on Friday as well.
But a bank official said that it was still awaiting figures from the statistical bureau, and that the numbers would be released by next Wednesday instead.
While interpreting bureaucratic maneuverings in China is always difficult, many economists and bankers with connections in Beijing have said in recent weeks that an economic policy tussle is under way there.
The skirmish pits Western-trained economists at economic policy agencies like the central bank and the securities commission against political bosses who are leery of higher interest rates, fearing they could halt or even reverse China's upward-spiraling property prices.
In the Chinese government's weekly auction of one-year Treasury notes on Tuesday, interest rates climbed to 3.46 percent from 3.41 percent a week earlier. But demand for the notes was very strong and the government nearly quadrupled the volume of bills auctioned, to $1.8 billion worth.
Interpreting such auctions is difficult in China.
In the United States, such strong demand for bills and a fairly modest increase in interest rates could be a sign that investors were confident that inflation would not rise much in the next 12 months.
But in China, where four deeply troubled, government-owned banks dominate the financial system, the strong demand could be another sign that the banks remain awash with cash.
Foreign investment has been flowing rapidly into China for the last two years, and the central bank has swapped the incoming dollars for yuan, sharply expanding the money supply and feeding inflation.
China was suffering from deflation just two years ago, but annual growth of 15 percent to 20 percent in the supply of yuan created an inflation problem instead.
China's initial efforts to slow the economy last spring caused Chinese stocks to lose more than a quarter of their value in a month, and they have only begun showing faint signs of recovery in the last several weeks.
Photo: A luxury housing complex in Beijing. Cheap loans have spurred a building boom, but rates may rise soon. (Photo by Peter Parks/Agence France-Presse -- Getty Images)(pg. W7)

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