Chinese to face higher costs of borrowing
Wednesday, 12 September 2007
Richard McGregor from Beijing
China could be in line for substantial rises in borrowing costs in the next 12 months following a central bank declaration that it wants an end to the negative real interest rates caused by a sharp increase in inflation this year.
Zhou Xiaochuan, the governor of the People's Bank of China, said on Friday that the PBoC was playing "close attention to the issue and hopes to see positive real interest rates".
Inflation hit a 10-year high in July of 5.6 per cent, far outstripping the one-year deposit rate of 3.6 per cent, which itself is subject to a 5 per cent withholding tax.
The rise in inflation has been almost entirely due to soaring food prices, triggered by a shortage of pigs, and pork, a staple meat, as well as the high cost of feed, partly driven by the tight global corn market.
Food makes up one-third of China's consumer price index and the price increases have hurt average and poorer urban families.
The government expects the pork shortages, and thus inflationary pressures, to continue into next year, because of the time it takes for farmers to rear pigs.
The negative real rates have been an important factor in fuelling local stocks in a market that is up fivefold in two years, as depositors have rushed to withdraw their funds to buy shares.
The government has long been wary of raising interest rates too rapidly for fear of encouraging further capital inflows and adding to the PBoC's already difficult job of managing money supply.
China's foreign exchange reserves were nearly $1,400bn (£691bn, €1,017bn) by the end of July, Zhang Xiaoqiang, a vice-chairman of the National Development and Reform Commission, said on Friday, mainly driven by the strong trade surplus. China has introduced measures to allow capital to flow out, most recently a scheme permitting Chinese individuals to buy shares in Hong Kong, but such measures would take time, he said.
The sudden rise in inflation has meanwhile forced a change in the PBoC's priorities, according to Stephen Green, of Standard Chartered Bank, in Shanghai.
"There has been a huge shift in sentiment in the PBoC in the last year, when they were concerned about inflows," he said.
China has already lifted interest rates four times this year and, in an effort to control liquidity, has increased the amounts of money commercial banks must leave on deposit with the PBoC seven times.
Under syndication arrangement
with FE
China could be in line for substantial rises in borrowing costs in the next 12 months following a central bank declaration that it wants an end to the negative real interest rates caused by a sharp increase in inflation this year.
Zhou Xiaochuan, the governor of the People's Bank of China, said on Friday that the PBoC was playing "close attention to the issue and hopes to see positive real interest rates".
Inflation hit a 10-year high in July of 5.6 per cent, far outstripping the one-year deposit rate of 3.6 per cent, which itself is subject to a 5 per cent withholding tax.
The rise in inflation has been almost entirely due to soaring food prices, triggered by a shortage of pigs, and pork, a staple meat, as well as the high cost of feed, partly driven by the tight global corn market.
Food makes up one-third of China's consumer price index and the price increases have hurt average and poorer urban families.
The government expects the pork shortages, and thus inflationary pressures, to continue into next year, because of the time it takes for farmers to rear pigs.
The negative real rates have been an important factor in fuelling local stocks in a market that is up fivefold in two years, as depositors have rushed to withdraw their funds to buy shares.
The government has long been wary of raising interest rates too rapidly for fear of encouraging further capital inflows and adding to the PBoC's already difficult job of managing money supply.
China's foreign exchange reserves were nearly $1,400bn (£691bn, €1,017bn) by the end of July, Zhang Xiaoqiang, a vice-chairman of the National Development and Reform Commission, said on Friday, mainly driven by the strong trade surplus. China has introduced measures to allow capital to flow out, most recently a scheme permitting Chinese individuals to buy shares in Hong Kong, but such measures would take time, he said.
The sudden rise in inflation has meanwhile forced a change in the PBoC's priorities, according to Stephen Green, of Standard Chartered Bank, in Shanghai.
"There has been a huge shift in sentiment in the PBoC in the last year, when they were concerned about inflows," he said.
China has already lifted interest rates four times this year and, in an effort to control liquidity, has increased the amounts of money commercial banks must leave on deposit with the PBoC seven times.
Under syndication arrangement
with FE