By KEITH BRADSHER – New York Times – 02/02/2011
HONG KONG — China’s government, increasingly worried about soaring inflation, plans to continue tightening its money supply and will probably raise interest rates again within the month. That is the forecast of economists and bankers with knowledge of policy makers’ views, who insisted on anonymity because of the political and diplomatic sensitivity of Chinese monetary policy. Inflation lately has caused friction in China’s mighty export machine. Now, Beijing’s efforts to fight inflation, through higher interest rates and tighter restrictions on bank loans, could begin to slow segments of China’s domestic economy slightly — particularly the breakneck pace of investment in new factories, office buildings and apartment complexes. That, in turn, could weaken demand for industrial materials like steel and copper that depend heavily on Chinese purchases. And yet, the tighter-money policies and higher interest rates could be good news for Chinese consumers, whose spending China has been counting on for its next wave of growth — not only to help balance the country’s export-dominated economy but to enable more of the nation’s 1.3 billion citizens to share in its prosperity.
For one thing, a slowdown in speculative construction could slow or even temporarily reverse the long rise of Chinese real estate prices, as 15 million people a year pour into the cities. And while much of the construction spending, and the loans that fuel it, involve state-owned companies, households in China are typically savers, not borrowers. They pay for most cars and other large purchases with cash. Even for new homes, they typically borrow half or less of the purchase price. So far, consumers frequently hold large bank deposits that earn interest rates well below the inflation rate. Higher interest on savings accounts, if the new policies allow, would only improve consumer purchasing power.
Much of China’s inflation is being fueled by the extraordinary growth in its money supply, broadly measured as so-called M2, which has soared a total of nearly 53 percent in the last two years. That is largely a result of the country’s aggressive monetary and fiscal stimulus program in 2009 and early 2010, as Beijing essentially printed money in response to the global financial crisis. Although China’s economy is a little less than half that of the United States, its money supply is now one-quarter larger than America’s. Since the beginning of last year, Beijing has moved several times to start clamping back down on the money in circulation, by increasing the required amounts that banks must hold in reserve, leaving them with less money to lend. The central bank has raised this requirement seven times in the last 13 months, with four of those increases coming in quick succession since mid-November. The bank has also been raising interest rates. The benchmark rate for one-year corporate loans is now 5.81 percent, up from 5.31 percent a year ago. The central bank has already raised rates twice since late October, and is poised to raise them again this month, the economists and bankers said.
Economists at international banks tend to agree that China needs to take even further action to limit inflation. “We believe Beijing must act more decisively on credit tightening to stop inflation from rising too fast,” said Qu Hongbin, the chief China economist at HSBC, in a research note on Monday. China’s consumer price index climbed 4.6 percent last year. But Chinese and Western economists say the index seriously underestimates inflation because of shortcomings in how it measures the introduction of new garments and other goods and because it entirely excludes the cost of owner-occupied housing. The National Bureau of Statistics in Beijing has said it is working on improving the index. One policy change Beijing is unlikely to take soon is letting the currency, the renminbi, appreciate faster as a way to fight inflation, the economists and bankers said. The renminbi has already been rising at an annualized rate of 5.7 percent against the dollar since China broke the currency’s peg to the dollar last June. China’s central bank continues to intervene heavily in currency markets to brake the renminbi’s rise, but not enough to stop the renminbi from rising altogether — as it did for almost two years before last June.
The Obama administration, arguing that an artificially low renminbi gave Chinese exporters an unfair price advantage over Western companies, pushed China hard a year ago to break the link to the dollar. But Washington has been slightly less vocal on the subject more recently. It barely came up in public comments by either side after President Hu Jintao of China’s recent state visit to the White House. Lately, Chinese and American policy makers have been looking at the so-called real effective exchange rate, which includes differences in the two countries’ inflation levels. Inflation in the United States is currently running at a rate of only about 1.5 percent. Depending on which inflation index is chosen in each country, and whether any adjustments are made for the consistent underestimates of Chinese inflation because of methodology problems, the real effective exchange rate measure shows that the renminbi is strengthening by 10 percent or more a year against the dollar.
The Treasury secretary, Timothy F. Geithner, has said that this real exchange rate is showing that Chinese exporters already face rising costs as they try to stay competitive in the United States market. There has been some uncertainty in financial markets since Mr. Hu announced in early December that the country would pursue a “stable” monetary policy. But the People’s Bank of China, the country’s central bank, has signaled in no fewer than a dozen statements since Mr. Hu’s remarks that it plans to throttle back the torrents of money still sloshing through the Chinese economy. And a policy paper from the central bank this winter indicated that, in Beijing, “stable” can in fact mean “tighter.” The paper described five settings for Chinese monetary policy: easy, suitably easy, stable, suitably tight and tight. The paper said that policy had moved from suitably easy to stable.