PBOC Adviser Sees Only Slow China Rate Moves as Politburo Switches Policy

China will raise benchmark interest rates only slowly and won’t “slam on the brakes” as the nation officially switches to a tighter monetary policy, said Li Daokui, an academic adviser to the central bank.

The nation will move next year to a “prudent” policy from the current “moderately loose” stance, according to a statement by the ruling Communist Party’s Politburo, reported today by the state-run Xinhua News Agency. Fiscal policy will continue to be “proactive,” Xinhua said.

“Interest rates will be adjusted over the next year, but the process will be gradual and slow and take into account various factors including global conditions,” Li said in a phone interview in Beijing. “A monetary policy shift won’t happen overnight.”

China already has been winding back stimulus policies this year to rein in liquidity and combat accelerating inflation after the nation bounced back from the financial crisis. Inflows of capital to Asia, the region leading the global recovery, threaten to fuel price gains and asset bubbles.

Banks’ reserve ratios may need to increase further to counter capital inflows and the so-called frontloading of loans that may take place at the start of next year, said Li, who is the head of Tsinghua University’s Center for China in the World Economy. He has a Ph.D. in economics from Harvard University and has worked at Stanford University’s Hoover Institution.

Crisis Policy

The People’s Bank of China raised lending and deposit rates in October for the first time since 2007, lifted banks’ reserve requirements with five publicly announced increases this year, and has restricted loan growth. The one-year lending rate is at 5.56 percent, while the deposit rate is 2.5 percent. Li didn’t give a specific forecast for rate moves.

Officials also in June ended a crisis policy of pegging the nation’s currency to the dollar. The yuan can strengthen at a faster pace if gains are controllable, Li said, adding that appreciation would help to ease inflation and aid economic rebalancing.

The nation lags behind counterparts from Malaysia to South Korea in boosting borrowing costs. South Korea has raised rates twice this year, Malaysia three times and India six. Thailand’s unexpected increase this week was the nation’s third in 2010.

China has a sound base for stable and fast growth next year even as difficulties and challenges remain, the Politburo said today, adding that the government will ensure food supplies and stabilize prices.

The government last used the term “prudent” for monetary policy in 2007 before shifting to a tighter stance as overheating risks increased before the financial crisis.

‘Imminent’ Policy Move

“Rate hikes are imminent -- we expect one by the end of the month, with more to come in 2011,” Brian Jackson, a Hong Kong-based emerging-market strategist at Royal Bank of Canada, said after the Politburo statement.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slipped 1.2 points, or less than 0.1 percent, to 2,842.43 at the 3 p.m. local-time close, after the statement.

China’s next rate increase may come today or on Dec. 10 and the yuan may strengthen at a “slightly” faster pace before year-end, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank.

By 7:10 p.m. local time, the central bank had made no announcement on any move today.

Economists, including at Morgan Stanley, expect the government to trim the nation’s lending quota again next year. Inflation pressures have been highlighted by companies including McDonald’s Corp., the world’s largest restaurant chain, pushing up prices.

China’s Expansion

At Bank of America-Merrill Lynch, economist Lu Ting said today that continuing a “proactive” fiscal stance while tightening monetary policy will allow the government to maintain economic growth of around 9 percent. The expansion was 9.6 percent in the third quarter from a year earlier.

According to Li, fiscal policy will remain “very expansionary” with the budget deficit staying at about 3 percent of gross domestic product.

October’s inflation rate of 4.4 percent was the highest in 25 months and the nation has had record property-price gains this year. Luxury-home costs in Beijing and Nanjing and so- called mass-market prices in Shanghai and Shenzhen have become “increasingly disconnected from fundamentals,” according to an International Monetary Fund study released today.

Work Conference

The announcement from the Politburo, the 25-member body that oversees the Communist Party and policy-making, came ahead of an annual economic work conference that will set guidelines for the coming year. That event may take place Dec. 10-12, Xinhua said.

Concern that monetary tightening will cut corporate profits and damp growth spurred a 6 percent sell-off in China’s benchmark stock index in the past month.

Today’s announcement of a “prudent” stance had been predicted by economists including at Deutsche Bank AG. and China International Capital Corp. Central bank officials and advisers had also used the term.

--Li Yanping. Editors: Paul Panckhurst, Nerys Avery.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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