China central banker sees 'room to manoeuvre'

Chinese central banker Yi Gang said the nation’s monetary policies were flexible and could be either tightened or loosened.

Policy makers have “room to manoeuvre,” Yi, a deputy governor who’s also the head of the nation’s currency regulator, said in a speech at a financial forum in Shanghai on Saturday.

Analysts are split on whether the People’s Bank of China (PBOC) will raise interest rates this year from crisis levels as the world’s third-biggest economy surges back from the financial crisis. Li Daokui, an academic adviser to the central bank, told reporters at the same forum yesterday that inflation expectations were easing, weakening the case for an increase in rates.

In China, steps toward a return to pre-crisis policies have included raising banks’ reserve requirements and allowing a more flexible yuan. The central bank indicated last week that the yuan’s peg to the dollar, in place since July 2008, had been scrapped. The yuan’s biggest gain in 18 months against the US currency followed. Yi said policy “dead ends” could result when a nation maintained a peg to a single currency, set interest rates at zero, or had excessive government debt.

“China’s various monetary policies currently all have flexibility and room to manoeuvre so that we can loosen or tighten whenever we see appropriate,” the official said.

Economists divided
HSBC Holdings forecasts a rate increase this year, while Morgan Stanley takes the opposite view. Last week’s survey showed eight of 14 economists predict the People’s Bank of China will raise the 5.31 per cent benchmark one-year lending rate by the end of December, while six see no change.

The government wants to sustain the nation’s expansion while cooling property prices and restraining gains in the cost of consumer goods after record credit growth increased the risk of inflation getting out of control.

Gross domestic product grew 11.9 per cent in the first quarter from year earlier, the fastest pace in almost three years. Inflation topped the government’s 3 per cent target ceiling for the year in May and property prices jumped a near- record 12.4 per cent.

“The goal of raising interest rates is to manage inflation expectations,” Li, the central bank adviser, told reporters yesterday. “If inflation expectations are easing, even though inflation is rising by more than 3 per cent, there is no basis for a rate increase.”

His view contrasts with that of Tim Condon, a Singapore- based economist for ING Groep NV.

The Chinese economy has recovered “and it’s time to normalise policies” to avoid more “excesses,” after the property market overheated and local-government borrowing surged, Condon said last week. Raising benchmark rates to pre-crisis levels would help to “reduce inflation pressure, discourage property speculation and support economic re-balancing by discouraging over-investment,” he added.