By Xin Zhiming (China Business Weekly)
Updated: 2007-11-26 07:26

The real estate sector is set to be one of those in the cross-hairs, according to Chen.

"The effect of previous tightening measures targeted at the sector is yet to be seen," he says. "Further measures may be taken in the future."

But those moves will also be structural, he said. Some cities have seen their house prices rising too fast while prices in others may remain acceptable. "This should be taken into consideration in carrying out regulations."

An across-the-board housing price slump would cause serious trouble to the national economy, he warns.

The central bank is expected to raise the benchmark interest rate soon despite the recently slumping stock market, analysts say.

"I don't think the rate decision is affected by stock market performance," says Sun. "In fact, we have been forecasting a further 27-basis-point rate hike by the end of this year, which should signal the end of this cycle of rate hikes."

Goldman Sachs (Asia) forecasts there will be two more interest hikes by the end of this year.

Raising interest rates, whether once or twice, would ease public concerns about the negative real interest rate as inflation in October was 6.5 percent and 4.4 percent overall for the first 10 months, higher than the benchmark one-year bank deposit interest rate of 3.87 percent.

Coupled with increasing bank reserve requirements, another rate hike will dampen loan-driven investment, analysts said.

Sun says inflation will likely not be a serious problem next year as "it should decline sharply after the Chinese lunar new year".

As a forward-looking decision-maker, the central bank does not need to hike interest rates aggressively to catch up with recent high inflation, he says.

As the US Fed cut interest rates in the past three months, further hikes in the renminbi's interest rate will narrow the interest rate differential between US dollar and renminbi even further, which may encourage more speculative money into China, he warns.

Zhou Xiaochuan, governor of central bank, said last week that it was not advisable to raise the interest rate too often.

Even if monetary tools are not considered, options remain open for policy-makers.

The State Council has ordered new investment projects that do not have proper approval procedures must be stopped. All new projects must be properly authorized and meet land use, energy efficiency, market access and environmental protection criteria.

"In the meantime, we foresee the direct quantity control of commercial banks' lending will continue to be an important part of the tightening package," Goldman Sachs (Asia) says in a research note.

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