CRI听力: Interest Rate Increase or Not

Many economists are debating whether the Chinese economy is overheating and when the central bank will increase interest rates.

Let's take a closer look with reporter Liu Min.

Reporter:

Rising inflation in China has triggered an intense debate among economists. The Consumer Price Index, a measure of inflation, rose to 2.2 percent in January and 2.7 percent in February, 0.4 percent higher than the previous prediction.

Morgan Stanley forecasts the CPI will exceed 3 percent during the first three quarters compared to the same time last year.

Chen Zhiwu from the Finance Department of Yale University believes China's central bank is facing mounting pressure to increase interest rates.

"Once the inflation rate exceeds 3 percent, it means the economy starts to overheat. So in the upcoming one or two months, there will be a great possibility that the central bank will increase the interest rate. Plus, many industries, especially the real estate market, have seen excessive investments with a higher potential for asset bubbles and inflation. So I think the time when the bank adjusts the interest rate is approaching."

Facing the pressure of inflation, the central bank has already employed most macro-economy adjustment tools at its disposal, including central bank bonds, the deposit reserve ratio, loan policies, and interest and exchange rates, leaving few options.

Central bank's president Zhou Xiaochuan was previously asked by a journalist whether the bank would increase interest rates. He responded by saying, "Who said it's going to be an interest rate increase?"

An interest rate increase can signal the end of a moderately easy monetary policy.

Zhao Xiao, an economist from the University of Science and Technology in Beijing, believes it is too early to say whether China's economy is overheating.

"The whole world economy is still experiencing a fluctuating recovery. This is actually a conclusion from the central bank of China. Even though it is recovering, the economy hasn't reached the level it was at before the crisis. It's very important to maintain steady economic growth, push forward structural adjustments and at the same time prevent inflation. So maintaining stable development is a priority at the moment. That's why I don't think there is a possibility to increase the interest rate in the first half of this year."

But other economists disagree. A research report from CITIC Securities forecasts the CPI in 2010 will be 3.2 percent and the Producer Price Index, a measure of the changes in prices received by domestic producers for their output, will be 5.1 percent.

All these forecasts point to inflation.

Chu Jianfang, an economist at CITIC Securities, predicts the current interest rate will double this year and sooner than expected.

"We believe April and May are a sensitive period of time. I think if they are going to increase the interest rate, then now is the time they can start."

Experts also indicate that a great deal of speculating foreign capital is another factor the government must consider. Once interest rates are raised, hot money will probably gush into the Chinese economy, and its short-term feature could create potential risks or even provoke a crisis in the country's economy.

Interest rates are a double-edged sword. And for the government, how to use them correctly is kind of art.

For CRI, I'm Liu Min.