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Thursday May 20, 05:05
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China needs ’more time’ to decide on rates
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Measures that China has taken to cool overheated investment are beginning to work and interest rates are not likely to rise until the central bank has more time to observe the effects of the current credit squeeze, senior officials said on Wednesday.
Price and demand trends in various overheated industries - such as steel, cement, aluminium and cars - appeared to confirm a statement by Huang Ju, vice-premier, that China’s efforts to rein torrid growth are showing signs of success.
"The Chinese government is taking a series of measures and has achieved preliminary results," Mr Huang said. "China’s economy will continue to grow at a relatively fast and steady pace."
"We will continue to implement stable monetary policy using various monetary policy tools to appropriately control the money and credit scale to prevent inflation and financial risks, at the same time promoting economic development," he added.
A debate on whether and when China should raise interest rates for the first time in nine years has raged for weeks within the Beijing government and among policy advisers.
One school of thought asserts there is no need for a rise until the consumer price index rises above 5 per cent year-on-year. In April, the CPI rose 3.8 per cent from a year ago. Another school argues that China is already in a state of general overheating and rates should rise to cool frenzied activity.
Other officials argue that hiking rates will do little to resolve China’s underlying problems, such as shortages of power, water and transport capacity. Conversely higher rates could depress consumer spending, exacerbating problems of oversupply in many manufacturing industries.
Zhou Xiaochuan, governor of the People’s Bank of China, central bank, was clear that he needed more time. "We still need to observe the current situation," Mr Zhou said. "It will take time for the government’s policies to feed through into the economy."
The economic evidence remains mixed. As Mr Huang said, there are signs that overheated sectors are being reined in. The price of steel - especially for those products used in construction - was falling almost across the board as demand from builders, car manufacturers and others declined.
Iron ore is piling up in ports along China’s coast, as steel mills wait for prices to drop before buying, industry executives said. One executive estimated that total inventories in Chinese ports totalled 25m tons, around 10m tons more than usual.
Aluminium prices have fallen around Rmb1,000 ($120) per ton over the last week to around Rmb15,400 on Wednesday on the Shanghai non-ferrous metal exchange. Copper has fallen by Rmb1,140 per ton since May 10 to Rmb24,360, traders said.
However, upward pressure on the prices of grain, transport, coal, electricity and several other products remained strong, economists said.
(FT.com)
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