China Needs to Raise Deposit Rates to 12-Year High on Inflation, Xie Says

China has to raise deposit rates by “at least” 3 percentage points in the next 12 months to protect investors faced with a negative return on their savings as inflation accelerates, independent economist Andy Xie said.

“To ensure stability and curb inflation, the government needs to compensate the savers, make them feel comfortable about their bank deposits,” Xie, formerly Morgan Stanley’s chief economist for the Asia-Pacific region, said in an interview in Bloomberg’s Shanghai office. “But you don’t want to do it too quickly. It could be half or one percentage point each time.”

A 300 basis point increase would raise the benchmark deposit rate from 2.5 percent to 5.5 percent, the highest since March 1998. Consumer prices will quicken to 6.2 percent by mid- 2011 after climbing 4.4 percent in October, according to Credit Suisse Group AG. China’s household deposits totaled 29.9 trillion yuan ($4.5 trillion) in September, exceeding the combined gross domestic product of Brazil, India and Russia, according to data compiled by Bloomberg.

The central bank raised deposit and lending rates by a quarter of a percentage point each on Oct. 19, the first increase since 2007, to curb inflation. The rate boost was four to six months late, according to Yale University finance professor Chen Zhiwu, who said at the time policy makers need to do more to combat rising prices.

Photographer: Qilai Shen/Bloomberg

Independent economist Andy Xie attending a forum in Shanghai. Close

Independent economist Andy Xie attending a forum in Shanghai.

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Photographer: Qilai Shen/Bloomberg

Independent economist Andy Xie attending a forum in Shanghai.

The People’s Bank of China last month raised lenders’ reserve requirements twice to drain cash from the financial system. The higher reserve requirement ratio won’t solve the issue of negative real interest rates, Australia & New Zealand Banking Group Ltd. economist Liu Li-gang said Nov. 22.

‘Too Much Power’

“The central bank has no real power in policy making,” Xie said. “The government has too much power.”

The nation’s savings ratio stood at 54 percent of gross domestic product in 2008, the highest among major economies in the world, according to data compiled by the World Bank.

China should develop its capital markets and expand the stock market to offer alternatives to bank deposits, according to central bank adviser Li Daokui.

“China’s bank savings remain at a very high level,” Li said in an interview published yesterday in the overseas edition of People’s Daily. “There could be potential risks for the banks and the nation’s whole financial system if there happens to be a large number of withdrawals suddenly.”

Gold Bars

Demand for gold has risen as concern about rising inflation increased the metal’s appeal as a store of value. China’s gold imports jumped almost fivefold in the first 10 months from the entire amount shipped in last year, according to the Shanghai Gold Exchange. About 70 percent to 80 percent of the imports in the first 10 months were made into mini-gold bars, which Chinese investors like to hold, Shen Xiangrong, chairman of the bourse, said yesterday.

Premier Wen Jiabao announced Nov. 17 a package of measures to counter inflation, from the threat of price caps for “daily necessities” to pledges to maintain the food supply by selling state reserves. Chinese futures for commodities including cotton sugar, rice and natural rubber have climbed to records in the past two months.

The country’s stock market will struggle to advance given the need for tougher measures to combat inflation, Xie said.

The Shanghai Composite Index has slumped 13 percent this year, the most among Asian benchmark gauges tracked by Bloomberg, on concern that lending curbs will hamper spending in the world’s fastest-growing major economy. The gauge, tracking the bigger of China’s two exchanges, lost 0.3 percent to 2,834.7 at 11:18 a.m.

“There’s no turn-around for China’s stock market in the short-term, as the government’s intention to further tighten policy is very clear,” Xie said.

--Irene Shen. With assistance by Yanping Li in Beijing, Margaret Conley in Shanghai and Paul Panckhurst in Hong Kong. Editors: Richard Frost, Darren Boey.

To contact Bloomberg News staff for this story: Irene Shen in Shanghai at +86-21-6104-3049 or ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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