China may delay raising interest rates until 2012

(Shanghai Daily)

07:58, August 12, 2011

China may join Asian nations from South Korea to India in delaying interest-rate increases after the nation's leaders called for global cooperation to stabilize financial markets.

The People's Bank of China is likely to leave borrowing costs unchanged for the rest of this year, according to eight out of 10 analysts surveyed this week. South Korea's central bank held rates steady at 3.25 percent yesterday, as expected, after market turmoil hit the country's stock market harder than others in Asia, even though the decision risked further damaging Seoul's inflation-fighting credentials.

The US Federal Reserve pledged earlier to keep interest rates near zero until mid-2013 and use other policy tools "as appropriate," addressing the slump in confidence that has triggered a global stock rout. China's State Council said "relevant nations" should adopt responsible fiscal and monetary policies to maintain investors' confidence.

"We have an increased risk of a global recession, so China will not raise rates now," said Wang Tao, a Hong Kong-based economist for UBS AG, who previously worked for the International Monetary Fund. China's inflation has peaked and "food prices are already correcting." 

China's consumer prices climbed 6.5 percent in July from a year earlier, the fastest pace since 2008, according to a report from the Beijing-based National Bureau of Statistics. That was more than the 6.4 percent median estimate in a Bloomberg News survey.

A slower-than-estimated 14 percent gain in industrial production suggested moderating economic growth may limit price pressures. Sliding commodity costs may also help.

The State Council's statement dropped previous language describing the fight against inflation as the nation's top priority, and policymakers are probably in a "wait-and-see mode," according to Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch.

US stocks jumped the most in the past two years, rebounding from the worst drop since 2008, after the Federal Reserve statement. Shanghai's stock index was little changed after a 2-day plunge of almost 6 percent.

"Usually the Chinese government stops doing anything when there's chaos around, that's the instinct," said Andy Xie, an independent analyst who was formerly Morgan Stanley's chief Asia economist. Interest rates will be "on hold for the time being, until global markets are recovering," he said.

The nation's key one-year lending rate is 6.56 percent after three increases this year, the most recent in July. The cost of pork, a Chinese staple, rose 57 percent last month from a year earlier, highlighting the risk that rising prices will lead to social instability. In signs of unrest this year, a dispute between a street vendor and authorities in Guangdong province in June led to protests during which crowds overturned cars and threw bottles at police. For the auto industry, inflation may mean slower sales growth, said Matthew Tsien, executive vice-president of General Motors' China unit.

"What it will lead to in the near term may be more modest levels of growth, maybe even flat growth for a period of time," he said.

Group of Seven nations and the G20 pledged this week to take all necessary measures to stabilize financial markets and foster economic growth in a bid to head off a collapse in investor confidence. China, the world's biggest exporter, relies on demand from the US and Europe.

Chinese officials told the IMF last month that the nation's monetary tightening since the global financial crisis had been "interrupted" for about six months by heightened sovereign-debt risks in Europe.

UBS, Societe General, Nomura Holdings, HSBC, Standard Chartered Bank, Citigroup, Daiwa Securities Capital Markets and Mizuho Securities Asia expect no rate increases in China this year, while Royal Bank of Canada and Barclays Capital continue to see such a move as likely.

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