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Zhou Indicates Global Turbulence Limits China Rates

Zhou Xiaochuan, governor of the People's Bank of China. Photographer: Andrew Harrer/Bloomberg
Zhou Xiaochuan, governor of the People's Bank of China. Photographer: Andrew Harrer/Bloomberg

China’s central bank Governor Zhou Xiaochuan indicated that turbulence in the global economy is limiting the nation’s ability to raise interest rates to counter inflation, according to the China Daily newspaper.

The government is taking a very prudent approach to increasing rates because of an unstable and rapidly changing global situation, the state-run paper reported today, citing Zhou. It didn’t say where or when he made the comments.

China’s inflation climbed to a 28-month high in November and officials pledged this month to shift to a tighter, “prudent” monetary policy stance in 2011. The central bank raised reserve requirements for lenders for the third time in five weeks on Dec. 10, while refraining from adding to October’s interest-rate increase, the nation’s first since 2007.

“The procrastination in raising interest rates will further increase the risk of asset bubbles and worsen the inflation situation,” said Chang Jian, a Hong Kong-based economist at Barclays Capital. “The government is likely to raise rates in the early part of next year.”

Global risks include Europe’s debt crisis. In contrast with Standard & Poor’s yesterday raising China’s debt rating, citing the nation’s fiscal strength, Moody’s Investors Service has put Spain on review for a possible downgrade.

‘Soft Landing’

China’s economy is undergoing a “soft landing” and the government can keep inflation within a “reasonable” range next year, Liu Mingkang, the nation’s top banking regulator, said at a forum in Beijing today.

Economic growth in the fourth quarter may slow to 9 percent from 9.6 percent in the previous three-month period, according to the median estimate of 17 economists surveyed by Bloomberg. The pace may cool to 8.4 percent in the first quarter of next year, the survey indicated.

China lags behind Asian countries including Malaysia and South Korea in boosting borrowing costs. Some economists predicted the People’s Bank of China would move last weekend after the release of inflation data and as officials completed an economic planning meeting in Beijing.

Zhou pledged more measures to curb liquidity and inflation, the China Daily said, without being more specific.

Reserve Requirements

The reserve requirement for the biggest banks is 18.5 percent, excluding extra curbs for individual lenders not publicly announced. For some, the level is temporarily 50 basis points higher, according to two people briefed on the matter.

In the medium term, average deposit rates in China will be higher than consumer-price gains to ensure stability in the economy, Zhou was quoted as saying. China’s benchmark one-year deposit rate is 2.5 percent, compared with an annual 5.1 percent inflation rate in November.

Former central bank Deputy Governor Wu Xiaoling said Dec. 11 that China was limited in raising rates by the threat of inflows of capital, which would add to excess liquidity. She cited a global environment of low interest rates.

China will make “noticeable progress” in the next five years in interest-rate liberalization, Zhou said separately at a financial forum in Beijing today. The lenders with the best ability to price risk should be given more freedom to set rates according to market conditions, ahead of those still bearing heavy “historic burdens,” Zhou said.

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