International | Jun 19 2006
By Terry Hughes
Despite Friday’s People’s Bank of China (PBoC) move to tighten monetary policy by raising reserve ratios for Chinese banks by 0.5% to 8%, analysts at Singapore-based DBS are convinced "there is too much steam in the Chinese economy" and that further interest rate hikes will be required to bring the dragon under control.
DBS argues that its view is supported by the raft of recent economic data that prompted Friday’s reserve ratio rise and that all the increase will do is to buy the PBoC a couple of months in which it will be able to assess upcoming data before raising rates again.
The reserve hike is not expected to have much of an impact and DBS now expects China to lift its benchmark 1-year lending rate by 25 basis points in 3Q, with a further hike anticipated in 4Q.
Furthermore, far from receiving a helping hand from the renminbi, DBS expects the Chinese currency to appreciate by a further 4% against the US dollar over the coming 6-12 months.
This is what Morgan Stanley says is causing the problems.
The capital inflows on the back of the renminbi’s appreciation are "undermining the government’s tightening efforts and putting China in a macro trap," the economists say.
Rebalancing the economy will take time, Morgan Stanley observes, arguing that revaluation is not the means of achieving it while calling for a shift in China’s growth mix.
It remains the bank’s view that an appreciating currency alone will do little to resolve global trade imbalances and to imports of consumer goods from the rest of the world, and that a large trade surplus should not cause the renminbi to rise.
Supporting this view, Morgan Stanley points to the large surplus which it says is solid evidence of excess capacity from several years of overinvestment.
The answer to the PBoC’s problems, in the bank’s opinion, will be rising wages.
Morgan Stanley is "hopeful that the multiplier effect" will be crucial in rebalancing the economy as it would "more than compensate for the decline in competitiveness" and shift China’s focus from exports to domestic consumption.
However, don’t expect this to happen overnight, "watch out for the turnaround in the supply-demand balance" and manufacturing price power over the next few years," Morgan Stanley says.
