China Needs to Raise Interest Rates More to Cool Prices, World Bank Says
The World Bank said China should raise interest rates and allow a stronger yuan to damp inflation, along with guarding against a surfeit of capital inflows.
“Further normalization of the macroeconomic stance is needed to guard against macro risks,” the World Bank said in a periodic report on the Chinese economy released today, citing asset-price gains, bad loans and “strained” local-government finances. “Interest rates will need to rise further.”
Funds pouring into Asia because of liquidity injections by central banks in developed countries shouldn’t deter China from raising rates, the lender said. China’s controls over capital movements have proven effective so far and officials can tighten regulations and use exchange-rate flexibility to limit inflows, the report said.
The Washington-based lender also said China’s economic prospects remain “sound,” boosting its estimate for the nation’s growth this year to 10 percent from a June forecast of 9.5 percent. Gross domestic product will expand 8.7 percent in 2011, compared with 8.5 percent in a previous estimate, it said in the report released in Beijing.
A stronger currency reduces inflation pressures and helps to rebalance China’s economy toward services and consumption and away from industry and investment, the lender said.
The yuan appreciated 2.3 percent against the dollar between mid June and early November, the World Bank said. However, since the dollar weakened substantially against many currencies, the yuan depreciated “in nominal effective terms,” it said.
Regional Standout
China has lagged behind some Asian counterparts in raising interest rates from crisis levels. Last month’s increase in the benchmark one-year lending rate to 5.56 percent was the first since December 2007. In contrast, India yesterday raised rates for the sixth time this year.
Property-market speculation and inflation expectations were the targets of the rate increase, the People’s Bank of China said late yesterday. Consumer prices rose 3.6 percent in September, the most in almost two years.
Property prices are “unlikely to be contained for long” because of rapid urbanization, income growth and low interest rates, the development bank said today.
The World Bank also said that China’s trade and current- account surpluses are rising, a shift from their slide during the financial crisis.
Reserves Climb
“A lack of success in rebalancing China’s growth pattern would be among the more serious medium-term risks for China and the world economy,” the bank said. The bank forecasts Chinese foreign-exchange reserves, the world’s largest, to top $3 trillion next year, from $2.65 trillion in September.
Wider Chinese surpluses could add to global trade and currency tensions. Group of 20 Finance ministers and central bankers ended talks in South Korea last month foreswearing “competitive devaluation” to calm fears of a trade war stemming from using cheaper currencies to spur growth.
“The global imbalances and the tensions they create cast a shadow over the global outlook,” the World Bank said.
Inflation pressures remain muted for now, the report indicated.
“Pushed up by higher food prices, inflation may stay about the 3 percent target for a while,” the World Bank said. “It is unlikely to escalate as core inflation remains in check.”
-Chinmei Sung in Taipei. Editors: Paul Panckhurst, Chris Anstey
To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net.
To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net
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