International | Jul 18 2006
By Chris Shaw
China is expected to release its latest growth figures today, with market consensus expecting a quarterly growth rate in excess of 10%, with much of the increase attributed to ongoing strength in credit or investment growth.
This has led many experts to suggest further interest rate increases are likely and in fact desirable, as the preferred outcome in terms of sustaining growth would be for the economy’s growth rate to fall slightly.
Lehman Brothers is one to suggest higher rates are needed, primarily because of the poor quality of the growth being achieved. It notes too much liquidity and over-investment in some sectors such as housing and steel are still the main drivers of the economy’s overall growth, so more official action is required to slow down the excesses these are causing.
Credit Suisse takes a similar view, suggesting further interest rate increases are imminent as the government continues its attempts to slow the pace of credit expansion. The broker expects the People’s Bank of China (PBOC) will be conservative in its moves though, with the scope of any increases in rates likely to match the previous increase in April of 0.27%.
Deutsche Bank is forecasting two further increases totalling 0.54% by the end of the year, suggesting such an increase should be enough to have an impact on those sectors where overinvestment has been rampant. ABN Amro agrees another rate hike looks likely in the short-term, but suggests it will take concerted action for the PBOC to achieve success in limiting the pace of investment growth.
In its view success could be achieved through a series of interest rate increases, the broker suggesting as an example a 0.25% increase every six weeks or so. However, it sees the possibility of such action as very small, so unless the key reasons behind the high rate of investment growth – excessive liquidity from the large current account surplus and capital inflows, the low cost of money, a bias towards investment in state-owned enterprises and the undervalued exchange rate are dealt with, the government is unlikely to be successful in dealing with the problem.
