World Bank says China needs interest rate rise
Updated
The World Bank has indicated an interest rate rise is needed to keep the lid on the rapidly growing Chinese economy.
The bank has lifted its growth forecast for China, from 9, to 9 and -a-half per cent this year, amid increasing fears the property sector is heading for a crash.
Presenter: Scott Alle reports.
Speaker: Dr Louis Kuijs World Bank report on China's main author
- Listen:
- Windows Media
Recent warnings that the engine of global economic growth was in danger of "throwing a piston", haven't been backed-up in the World Bank's quarterly report on China's economy.
However the report's main author Dr Louis Kuijs obliquely acknowledged there is some danger of a price bubble in the property market
You know the interesting thing about bubbles is that you never know you are in a bubble until it bursts.
Property prices in China surged nearly 11 per cent in February.
This month several economists have warned its now vital the government take more decisive measures to prevent overheating caused in part by large stimulus packages and an easing in bank lending policies.
The World Bank senior economist remains confident Beijing's policymakers will intervene well before property asset values become unsustainable.
I think what is safe to say and what is a good attitude for the government is to err on the side of the caution and to not let things go out of control which is why think it makes sense for the government to tone down on the monetary stance and to ensure things do not get out of hand
Indeed banks have reportedly been stopped from providing loans to developers found to be hoarding land or holding back sales of apartments in order to wait for higher prices.
The banks' reserve requirements have been raised twice this year, effectively limiting the amount they can lend to companies, and a tax on home sales has been re-imposed.
But Dr Kuijs believes the best tool to tweak monetary policy still needs to applied.
We think to make the monetary tightening more convincing we think an interest rate increase would make sense yes.
Rates have been hold since late 2008 in order to boost domestic spending and underpin growth.
The predictions range from a hike this month to rises sometime in the next quarter from April to June.
Dr Kuijs says the task of the People's Bank of China in regulating monetary policy has been more difficult because of the protracted recession in the United States.
Economic cycles are starting to diverge. When the cycles in Asia are starting to diverge from that in the US and that makes things more complicated for monetary policy especially if the exchange rate is still benchmarked around the dollar so that is why over time we may see in Asean countries like China more interest in more flexible arrangements.
In other words what US lawmakers are pushing hard for, a revaluation of the yuan, may occur soon due to the very weakness of the American economy.
