China Interest Rate Increases Likely in 2011, Survey Shows

China’s central bank will likely hold off from adding to this week’s interest-rate increase until 2011, when it will raise borrowing costs at least twice to tame inflation, according to economists surveyed by Bloomberg.

The People’s Bank of China will leave the benchmark one- year lending rate at 5.56 percent through December, according to 12 of 17 forecasts made yesterday in a Bloomberg News survey. Eight of 12 respondents said the rate, used to set a minimum cost for loans in the world’s fastest-growing major economy, will jump at least half a percentage point by the end of 2011. Nomura International Ltd. had the most aggressive estimate, predicting a one percentage point increase for next year.

“The risk is inflation will remain an issue and that’s why next year we have four more rate hikes” as our forecast, Robert Subbaraman, chief economist for Asia excluding Japan at Nomura, said in an interview yesterday in Hong Kong. “Administrative measures are starting to lose their effectiveness.”

Policy makers in emerging markets are stepping up efforts to cool price gains as central banks in the U.S. and Japan favor near-zero interest rates and money-printing to avert recessions. Economic expansion in China will moderate to 9 percent in 2011 from 10.1 percent this year, based on the median estimates in the Bloomberg surveys. Second-quarter data show growth rates were 8.8 percent in Brazil and India, while Russia’s was 5.2 percent.

Photographer: Nelson Ching/Bloomberg

The People’s Bank of China will leave the benchmark one-year lending rate at 5.56 percent through December, according to 12 of 17 forecasts made yesterday in a Bloomberg News survey. Close

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Photographer: Nelson Ching/Bloomberg

The People’s Bank of China will leave the benchmark one-year lending rate at 5.56 percent through December, according to 12 of 17 forecasts made yesterday in a Bloomberg News survey.

China’s Moves

During the past month, China announced its first rate increase since 2007, boosted reserve-requirement ratios for the largest banks for the fourth time this year and allowed gains in the yuan to accelerate in a bid to prevent asset bubbles as funds pour into the nation.

Foreign-exchange reserves jumped by $100 billion in September to a record $2.65 trillion, the biggest increase since Bloomberg began tracking the data in 1995. Traders in the swaps market also expect borrowing costs to rise next year.

The People’s Bank raised its benchmark one-year lending by a quarter of a percentage point on Oct. 19 to 5.56 percent and the deposit rate by the same amount, to 2.5 percent. China caps the maximum rate banks can pay on deposits and sets a floor on borrowing costs of 90 percent of the benchmark one-year rate, a requirement in place since 2004.

“It seems increasingly clear that Beijing still has more to do to keep the Chinese economy on an even keel,” said Brian Jackson, an emerging-market strategist at Royal Bank of Canada in Hong Kong. “We continue to expect more rate hikes. Risks are building” for a move in the first quarter, he said in an interview yesterday.

Interest-Rate Swaps

One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, rose 19 basis points this week to a four-month high of 2.38 percent. While the swap rate is still lower than the deposit rate, the rising level suggests investors are adding bets on another increase in borrowing costs this year.

Five-year interest-rate swaps climbed 35 basis points this week to 3.44 percent, according to data compiled by Bloomberg. The Shanghai Composite Index of stocks gained 0.1 percent.

China’s gross domestic product increased 9.6 percent in the last three months from the same period of 2009, the smallest gain in a year, the statistics bureau reported. Inflation accelerated to a 23-month high of 3.6 percent in September. The U.S. economy expanded 3 percent in the second quarter and in Japan, where consumer prices have been sliding for 18 months, growth was 2.4 percent.

Capital Flows

Inflows of capital caused the yuan to strengthen 1.7 percent in September, the biggest monthly gain since a peg ended in July 2005. It has appreciated 0.5 percent this month to 6.6574 per dollar in Shanghai. Non-deliverable forwards show traders expect 2.8 percent appreciation to 6.4780 during the next 12 months.

The currency will end this year at 6.60 per dollar before strengthening 5.8 percent to 6.24 in 2011, based on the median estimates in yesterday’s Bloomberg survey.

The rate increase “is an admission that they are worried about the property sector,” Ben Simpfendorfer, a Hong Kong- based economist at Royal Bank of Scotland Plc, said in an interview yesterday. “They are struggling to control it.”

Since April, Chinese policy makers have tightened down- payment requirements, suspended loans for third-home purchases and pledged to speed up trials of a property tax that may be rolled out nationwide.

Property Prices

Even with the added controls, property prices in 70 Chinese cities climbed 0.5 percent last month from August and the value of real-estate sales soared 56 percent, the statistics bureau reported Oct. 15. New home prices in Shanghai climbed 11 percent to 22,376 yuan ($3,366) per square meter in the week ended Oct. 17 from the previous week, according to property consultant Shanghai UWin Real Estate Information Services Co.

Capital inflows have pushed down rates in China, which has the lowest 10-year bond yield among the BRIC nations at 3.6 percent, compared with 11.93 percent in Brazil, 8.14 percent in India and 7.59 percent in Russia.

The yield on China’s 3.28 percent bond due in August 2020 was little changed at 3.6 percent according to the National Interbank Funding Center. It surged 22 basis points on Oct. 20. Three-month bill yields climbed 20 basis points to 1.77 percent at an auction yesterday, the first time since June 10 the rate has increased.

Banks have lent about 6.3 trillion yuan this year and can extend a maximum of about 400 billion yuan in each of the final three months if the government is to meet a target of limiting new lending to 7.5 trillion yuan.

“As further hikes are expected, declines in asset prices will become more likely as credit becomes more expensive,” Lina Wong, a Shanghai-based managing director of Colliers International Ltd. said in a statement to reporters yesterday. Colliers is the world’s third-largest global property broker.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editors responsible for this story: Chris Anstey at canstey@bloomberg.net; Sandy Hendry at shendry@bloomberg.net.

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