By Li Yanping and Zhang Dingmin
Oct. 18 (Bloomberg) — China will step up measures to curb excess cash in the economy and may use more or bigger rate increases to prevent overheating, central bank chief Zhou Xiaochuan said.
“We don’t rule out steeper or more frequent moves if necessary,” Zhou, governor of the People’s Bank of China, said during an interview with reporters today at the Communist Party Congress in Beijing. Controls so far “haven’t been very effective.”
The bank will keCommunist Partyep using a mix of policy tools including rate increases, higher reserve ratios and more bill sales, he said. The central bank is concerned with rising asset prices though that isn’t the sole driver of monetary policy, he said.
The world’s fastest-growing major economy has doubled in size since President Hu Jintao succeeded Jiang Zemin five years ago. A surge in exports that helped drive growth now threaten to derail the expansion by flooding the economy with cash, stoking inflation and a possible stock market bubble.
“The spike in headline inflation is hurting bank depositors, and this may encourage the People’s Bank to raise rates once more this year,” Mark Williams, an economist at Capital Economics Ltd. in London, said in a research report dated today. “However, the authorities are walking a tightrope.”
Gross domestic product grew 11.9 percent in the second quarter, the fastest pace in 12 years. Five benchmark interest rate increases by the central bank this year have failed to rein in inflation, which reached a 10-year high of 6.5 percent in August and prompted more households to pour money into stocks and property.
The National Development and Reform Commission, China’s top economic planning agency, said today at a separate briefing that fighting inflation remains a priority, and warned the rate will stay high “for a few months.” The September rate was 6.2 percent, the NDRC said today.
China isn’t ready to adopt an inflation target when setting interest rates, and places a higher priority on growth. The bank considers growth, inflation, employment and international balance of payments in setting monetary policy, Zhou said.
To soak up excess liquidity and limit loan growth, the central bank has instructed lenders to set aside larger reserves eight times this year, sold more bills to bigger banks, and this week required smaller lenders to put special deposits with the central bank.
The required reserve ratio on banks was raised to 13 percent on Oct. 13, the highest in a decade, and the benchmark one-year lending rate is at a nine-year high of 7.29 percent.
The bank has also raised interest rates on some mortgages and increased the minimum deposit on second homes to curb speculation and cool prices.
Yuan, Capital Account
Zhou, 59, as central bank governor since December 2002 presided over the nation’s first change in currency policy in a decade. He ended the yuan’s peg to the U.S. dollar and revalued it by 2.1 percent in 2005. The change was partly a response to major trading partners including the U.S., where politicians assert the currency is kept artificially low to boost exports.
“The yuan will eventually become a freely convertible currency and China will open its capital account, even if we haven’t set a clear timetable,” Zhou said. “China had agreed in principle to make the yuan convertible in the 1990s, but we halted the plan during the 1997 Asian Financial Crisis.”
China will discuss the currency with the European Union during the International Monetary Fund meeting, he added.
Separately Zhou reiterated that the government has agreed, in principle, to allow Chinese individual investors to trade Hong Kong stocks. There’s also no timetable for that.
“The direction is set” for the plan, known in China as a “through-train” to the Hong Kong market, he said without elaborating.
To contact the reporter on this story: Li Yanping in Beijing at firstname.lastname@example.org