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China's inflation hit 2.7% in February

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-03-13 11:02

Ha Jiming, chief economist at China International Capital Corp. in Beijing, expected the central bank to raise the interest rate if finding the combined inflation number in January and February above 2.5 percent, according to the Bloomberg News.

However, an interest rate rise is expected to attract more "hot money" into China, said analysts, adding to the excess liquidity plaguing the central bank.

Reining in excess liquidity is a priority of Beijing's monetary policy, said Wu Xiaoling in an article published by the People's Daily in February. However, interest rate could hardly contribute to this end, said Wu.

At current inflation rates, after-tax bank deposit rates are negative in real terms, inviting depositors to withdraw their cash and pump it into property and stocks, raising the risk of asset price bubbles.

The central bank in February ordered lenders to set aside more money as reserves for the fifth time in eight months. Lenders must set aside 10 percent of deposits, up from 9.5 percent.

The central bank has raised its benchmark interest rate twice since April. The current one-year benchmark lending rate stood at 6.12 percent.

At the press conference on Monday, Zhou Xiaochuan sought to reassure investors that the domestic stock market was not in the middle of a downward trend and that the country would increase the part direct financing played in the financial system.

He also said the country would build the market in line with international standards so "people ... can better cope with any changes."

Zhou said other countries, including the United States, also suffer from problems caused by excess liquidity.

He added that market regulators should adopt a prudent and "slightly tightened" policy.