China May Pause on Rates as Wen Bets Prices ‘Controllable’

Chinese Premier Wen Jiabao
Wen Jiabao, China's premier. Photographer: Michele Tantussi/Bloomberg

China may limit interest-rate increases for the rest of this year as Premier Wen Jiabao bets that a slowing economy will help tame inflation after five moves since mid-October.

A quarter-point boost to one-year lending and deposit rates was announced late yesterday, effective from today. That may be the last for 2011, according to JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Merrill Lynch. Nomura Holdings Inc. predicts one more move, this quarter.

The ruling Communist Party may delay further increases because of signs of weakness in manufacturing and export demand and to avoid attracting more speculative capital to the fastest-growing major economy. The central bank moved before a report scheduled for July 9 that may show consumer prices rose more than 6 percent last month, the biggest gain since July 2008 and a likely peak for this year, according to JPMorgan.

“This is likely to be the last hike of the year,” said Yu Song, a Hong Kong-based economist at Goldman Sachs Group Inc., citing a risk of “hot money inflows” and “the negative impact on real economic activities.” Yu and colleague Helen Qiao were jointly ranked the top forecasters of the Chinese economy in a Bloomberg analysis of estimates over the two years through May.

The Shanghai Composite Index slid 0.6 percent to 2,794.27 after yesterday’s announcement. Twelve-month non-deliverable yuan forwards were little changed at 6.3933 per dollar.

Pork Prices

Higher rates may help to curb consumer expectations that inflation will accelerate after a surge in pork prices drove a 12 percent jump in food costs in May from a year earlier. Slower economic growth and more favorable year-earlier comparisons may help to limit price gains in the second half.

Inflation accelerated to 6.2 percent in June, according to the median forecast in a Bloomberg News survey of economists. Consumer prices rose 5.5 percent in May, mainly driven by food.

China’s main monthly economic releases were brought forward to July 9 from a previous plan for a July 15 publication in the latest attempt by officials to stop selective disclosure of indicators that can disrupt markets. The National Bureau of Statistics said last month that one of its employees was under investigation on suspicion of leaking data. The bureau said today it will release its main monthly data the ninth of each month from now on.

The benchmark one-year lending rate will increase to 6.56 percent, the People’s Bank of China said on its website yesterday. The one-year deposit rate rises to 3.5 percent from 3.25 percent, while demand deposit rates are unchanged.

Remain Low

London-based Capital Economics Ltd. said that benchmark rates remain low “relative to the pace of economic growth” and predicted more gains in lenders’ reserve requirements as the central bank seeks to control liquidity. Bank of America said rate increases may resume in 2012.

Xia Bin, an academic adviser to the People’s Bank of China, said yesterday’s move was “not enough.”

Signs that the economy is cooling include a slide in a manufacturing gauge to a 28-month low in June. Export orders and output grew at a slower pace, according to the purchasing managers’ index released by the statistics bureau and China’s logistics federation.

Stocks and commodities fell yesterday on prospects for weaker global demand after the central bank moved and Moody’s Investors Service cut Portugal’s debt rating to junk.

Global Rates

China’s increase takes effect on the day the European Central Bank is expected to raise its benchmark rate a quarter point to 1.5 percent. Elsewhere, emerging markets have outpaced advanced economies in raising rates, with South Korea, India, Chile, Brazil and Poland doing so in the past month.

In India, the repurchase rate is 7.5 percent, while the U.S. Federal Reserve has indicated no imminent plan to lift its benchmark from near zero.

Premier Wen said last month that the government may fail to meet a full-year inflation target of 4 percent after the rate was 5.2 percent for the first five months.

“I see difficulties in reaching the full-year inflation target,” Wen said in comments in London, broadcast on June 27 by Hong Kong-based Cable TV. “But it still can be kept below 5 percent after the efforts we have made.”

Hazards for the economy include a credit squeeze for small and medium-sized companies and concern that the nation may face a wave of bad loans from record lending that fueled a recovery from the effects of the global financial crisis.

Debt Risks

The nation’s first audit of local-government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of 2010 and repayment risks. Standard & Poor’s has cut the outlook for the nation’s property developers to “negative” on the likelihood of slower sales and lower prices.

The nation’s economy is in a “bit of a bubble” after officials waited too long to stem inflation, billionaire investor George Soros, 80, said June 14 at a conference in Oslo.

Wen wrote in the Financial Times on June 24 that efforts to stem inflation have worked and the pace of consumer-price increases will slow. “The overall price level is within a controllable range and is expected to drop steadily,” the premier said.

Besides raising rates, officials have boosted banks’ reserve requirements to record levels, restricted mortgages and home purchases, and allowed gains by the yuan against the dollar. A stronger currency can limit inflation by cutting import costs.

Yum! Prices

Companies facing inflation pressures in China include Yum! Brands Inc., the owner of the KFC fast-food chain. The company said June 1 that rising wage costs will be offset by the boost from more people being able to afford its meals.

Analysts including Wang Tao, of UBS AG, say China is unlikely to suffer a “hard landing.” May data showed the economy maintaining momentum, with industrial production rising 13 percent and an acceleration in fixed-asset investment. A government plan to build millions of low-cost homes may also sustain growth.

The World Bank forecasts China’s gross domestic product will expand 9.3 percent this year, compared with 8 percent for India, 2.6 percent for the U.S. and 1.7 percent for the euro area.

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