Money

Bank's inertia may hurt expansion

By Li Yanping and Paul Panckhurst (China Daily)
Updated: 2010-12-14 10:28

BEIJING - China risks a more abrupt tightening in monetary policy next year after refraining from raising interest rates since October, even as inflation accelerated to the fastest pace in more than two years.

Consumer prices jumped 5.1 percent in November, according to the nation's statistics bureau. A measure of wholesale costs climbed 6.1 percent. Even so, the central bank held off over the weekend on the rate move predicted by some observers, including UBS AG and Mizuho Securities Asia Ltd.

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The policymakers' hesitation may be in part because of possible inflows of speculative capital after any rate hike that puts pressure on the yuan's exchange rate. However, there is now a danger that a quicker move to raise borrowing costs next year might unsettle expansion in the fastest-growing major economy.

"The only reason to hold back is the 'hot money' issue," said Shen Jianguang, a Hong Kong-based economist at Mizuho. "If they (central bank officials) are overwhelmed by this concern and refrain from a rate hike, inflation will be a big risk next year, and then eventually they will need to rush in tightening."

The Shanghai Composite Index of stocks closed 2.9 percent higher, paring to 11 percent the decline this year caused by investors' concern that government tightening will dampen growth and profits.

China's leaders pledged on Sunday to give greater priority to stabilizing prices in 2011 and to also better manage liquidity, Xinhua News Agency reported after the conclusion of the annual Central Economic Conference in Beijing, which set economic policy guidelines for 2011.

The central bank has raised rates once since December 2007, pushing the benchmark one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent.

Meanwhile, officials have warned that an influx of foreign capital may contribute to asset-price pressures. Funds are flowing into China because of monetary easing in developed economies and the strength of the nation's recovery, along with forecasts of higher rates and a stronger yuan.

Bloomberg News