China raises rates again in inflation fight
China raised interest rates on Thursday for the sixth time this year, a move intended in large part to ease growing public concerns about rising inflation.
The announcement of the rate rise came shortly after the People's Bank of China released a survey of depositors showing their dissatisfaction with price levels and expectations of continued increases- both at recent highs.
The central bank raised one-year benchmark deposit rates by 27 basis points to 4.14 per cent, and one-year lending rates by 18 basis points to 7.47 per cent.
The bank said it ordered the increase in order to "guide public inflation expectations" at a time when there was "upward pressure on domestic price levels and complex trends in the international environment".
Fuelled by soaring prices for pork, Chinese consumer inflation hit 6.9 per cent in November and looks likely to persist longer than officials had hoped.
In a sign that previous efforts to promote pig-rearing are proving insufficient, the government this week promised to double its subsidy to farmers for each fertile sow to Rmb100 next year and to give Rmb2.5bn to support large-scale standardised pig production.
However, economists warn that higher food prices are likely to endure and, together with rising energy costs, will fuel wider inflationary pressures.
Of 20,000 depositors questioned for the central bank survey, some 48 per cent considered prices to be "overly high and hard to accept", a rise of 23 percentage points year-on-year.
"Separately, 64.8 per cent of those surveyed expected prices to continue to rise next year, a record high" for the quarterly survey, which began in 1999, the bank said.
While the survey's vague wording leaves details of respondents' expectations unclear, it highlights the risk that price pressures will spread throughout the economy.
"It's a vicious circle. Once people get the idea that prices are going to be significantly higher then they are going to push for wage hikes," said Stephen Green, senior economist at Standard Chartered.
"If expectations are out of the basket, then it's very hard to control them again," he said.
Rising inflation comes at a time where there are broader concerns about the Chinese economy amid signs of over-investment in some sectors and forecasts of a major downturn in demand from the US.
A separate central bank survey of 5,497 companies found they were under growing pressure from higher prices and were increasingly concerned about over-heating.
"The enterprise confidence index is falling in step with intensifying concerns among company managers about overheating tendencies in the economy," the central bank said.
Despite such worries, the survey found some recovery in companies' fixed-asset investment, while a separate survey of commercial bankers found that a majority of them thought monetary policy "too tight".
Although bank real interest rates are negative, repeated interest rate rises appear to have boosted savers' enthusiasm, with the central bank survey finding growing numbers of depositors describing their returns as "appropriate". Recent stock market falls had also cooled enthusiasm for such investments, the central bank said.
To promote the use of term deposits - and thus prevent rapid shifts of funds from banks to stocks - the central bank cut the interest rate for current accounts by nine basis points to 0.72 per cent. ( FT )