China mark up rise talk builds as loans, inflation swell

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BEIJING: China is likely to raise interest rates in the coming days in a demonstration of the government’s resolve to tame inflation, an official newspaper said on Tuesday.
In a banner headline across its front page, the China Securities Journal said this weekend offered a “sensitive window” for a rate rise, which would be the country’s second following a surprise increase in October, the central bank’s first rate hike since 2007.
An increase in rates would also put flesh on the bones of Beijing’s announcement late last week that it was switching to a “prudent” monetary policy from the “appropriately loose” stance of the past two years.
The report weighed on Asian stock markets in early trade, though the country’s main index in Shanghai later pared losses. Chinese asset markets have tumbled in recent weeks as investors have priced in more tightening.
The newspaper said the timing was right for a rate rise with official monthly economic indicators, notably the consumer price index (CPI), likely to show an increase in inflationary pressure when released on Monday, December 13.
“With reference to the central bank’s record of raising interest rates just ahead of the release of CPI, this weekend will provide a window for a possible policy change,” the newspaper said, without citing any source.
China’s CPI in November may have accelerated to a 27-month high of 4.7 percent from a year earlier, according to a Reuters poll, up from a 4.4 percent pace in October.
“The general trend of China’s monetary policy is appropriate tightening on the basis of the previous extremely loose stance,” said Chen Jiagui, a senior government economist. Traders in China’s interbank market said big lenders have already prepared enough money for another 50 basis point increase in banks’ required reserves, which are already at a record high for big banks.
So far, the People’s Bank of China has relied primarily on reserve requirements to mop up excess cash in the economy, officially ordering lenders to lock up more of their deposits five times this year. Banks had also been holding back from lending in anticipation of more government moves to curb inflation, driving up short-term money market rates. However, these rates tumbled on Tuesday after large banks caved into pressure from smaller institutions which had refused to borrow at the higher rates. But concern over further hot money inflows could make Beijing hesitate before raising interest rates aggressively.
Comments from Chairman Ben Bernanke that the Federal Reserve could increase its commitment to buy $600 billion in US government bonds has reinforced fears in Beijing that money printed in the United States will compound the inflationary headache in China.
“I don’t think China should increase interest rates on a continuous basis,” said Chen Kexin, an economist with a government-sponsored market monitoring agency in Beijing. “Such a move will definitely attract hot money inflows.