Wednesday, October 03, 2007
UPDATE 2-Fed rate cuts don't tie China PBOC's hands - Zhou
By Judy Hua and Alison Leung
HONG KONG, Sept 21 (Reuters) - China will set monetary policy according to the needs of its economy and will not let itself be boxed in by a narrowing gap between Chinese and U.S. interest rates, central bank governor Zhou Xiaochuan said on Friday.
His comments were fresh confirmation that the People's Bank of China (PBOC), in order to curb inflation and get real deposit rates back into positive territory, is prepared to run the risk of attracting capital inflows betting on a stronger yuan.
"China has a large-sized economy and we would very much emphasise the domestic economic situation, such as domestic CPI, investment and consumption, in considering our interest rate policy," Zhou told a conference in Hong Kong.
The Federal Reserve cut interest rates by half a point on Tuesday and is expected to reduce them further.
The PBOC, by contrast, has raised rates five times so far this year -- most recently a week ago -- and economists confidently expect one more increase before the end of the year.
In the process, the premium of U.S. rates over Chinese rates has shrunk to about 1.5 percentage points.
After China depegged the yuan from the U.S. dollar in July 2005, the PBOC maintained a gap of 3 percentage points or more to make it expensive for speculators to borrow dollars and bet on a rise in the Chinese currency.
Wu Xiaoling, Zhou's deputy, said this month that the PBOC had given up maintaining a certain rate gap because money kept coming into China in any case, to chase gains in its red-hot asset markets.
Still, China's capital controls form a barrier to inflows, and Zhou said it was because the yuan was not fully convertible that China did not feel too constrained by the rate gap in setting monetary policy.
Although China has been cautiously relaxing its capital controls, Zhou said there was no timetable for making the currency fully convertible.
ASSET PRICES
The PBOC's last rate increase followed a rise in annual consumer price inflation to a decade high of 6.5 percent in August.
Although the rise was due entirely to a spike in the price of pork and other food items, the PBOC has expressed concern about a deterioration in inflationary expectations.
It is also worried that savers, with the real value of their deposits shrinking, have an incentive to take their cash out of the bank and pour it into stocks and property.
The Shanghai stock market (.SSEC: Quote, Profile, Research) has doubled this year, while property prices nationwide rose 8.2 percent in the year to August and are increasing much faster in places such as Shenzhen.
Although the central bank was quite concerned about asset prices, Zhou said that was more of an issue for the China Securities Regulatory Commission.
"We'll keep an eye on asset prices, but we can't focus too much on that," he said.
Most central bankers take the same view that, because it is impossible to know at the time whether or not a market is in a bubble, monetary policy should not try to target asset prices.
Zhou said China still had a lot of work to do to reduce the dominant role that banks play in China's financial system.
Beefing up the corporate bond market as well as the pension, mutual fund and insurance industries would help to improve the allocation of capital and hence the efficiency of investment.
A lively debate was also taking place in China about encouraging private equity funds, Zhou added.
"We think that the first important thing is to develop faster our capital market," he said.
David Dollar, the World Bank's chief representative in China, urged Beijing to make it easier for private firms to list on the stock market and to issue bonds.
"Banks in China are performing better but there's been surprisingly little reform in banks' behaviour: They are still making traditional collateral-based loans to large firms. A lot of small firms are not getting access to lending," Dollar told the conference.
He said China's 700 listed firms generated only 15 percent of China's corporate profits, so 85 percent of the economy was not connected to the stock market at all.
"Domestic private firms are at the heart of the Chinese economy and their links to financial markets at the moment are somewhat weak," said Dollar, who also expressed concern at the high price-earning ratios of those companies that are listed. (Additional reporting by Susan Fenton)
HONG KONG, Sept 21 (Reuters) - China will set monetary policy according to the needs of its economy and will not let itself be boxed in by a narrowing gap between Chinese and U.S. interest rates, central bank governor Zhou Xiaochuan said on Friday.
His comments were fresh confirmation that the People's Bank of China (PBOC), in order to curb inflation and get real deposit rates back into positive territory, is prepared to run the risk of attracting capital inflows betting on a stronger yuan.
"China has a large-sized economy and we would very much emphasise the domestic economic situation, such as domestic CPI, investment and consumption, in considering our interest rate policy," Zhou told a conference in Hong Kong.
The Federal Reserve cut interest rates by half a point on Tuesday and is expected to reduce them further.
The PBOC, by contrast, has raised rates five times so far this year -- most recently a week ago -- and economists confidently expect one more increase before the end of the year.
In the process, the premium of U.S. rates over Chinese rates has shrunk to about 1.5 percentage points.
After China depegged the yuan
Wu Xiaoling, Zhou's deputy, said this month that the PBOC had given up maintaining a certain rate gap because money kept coming into China in any case, to chase gains in its red-hot asset markets.
Still, China's capital controls form a barrier to inflows, and Zhou said it was because the yuan was not fully convertible that China did not feel too constrained by the rate gap in setting monetary policy.
Although China has been cautiously relaxing its capital controls, Zhou said there was no timetable for making the currency fully convertible.
ASSET PRICES
The PBOC's last rate increase followed a rise in annual consumer price inflation to a decade high of 6.5 percent in August.
Although the rise was due entirely to a spike in the price of pork and other food items, the PBOC has expressed concern about a deterioration in inflationary expectations.
It is also worried that savers, with the real value of their deposits shrinking, have an incentive to take their cash out of the bank and pour it into stocks and property.
The Shanghai stock market (.SSEC: Quote, Profile, Research) has doubled this year, while property prices nationwide rose 8.2 percent in the year to August and are increasing much faster in places such as Shenzhen.
Although the central bank was quite concerned about asset prices, Zhou said that was more of an issue for the China Securities Regulatory Commission.
"We'll keep an eye on asset prices, but we can't focus too much on that," he said.
Most central bankers take the same view that, because it is impossible to know at the time whether or not a market is in a bubble, monetary policy should not try to target asset prices.
Zhou said China still had a lot of work to do to reduce the dominant role that banks play in China's financial system.
Beefing up the corporate bond market as well as the pension, mutual fund and insurance industries would help to improve the allocation of capital and hence the efficiency of investment.
A lively debate was also taking place in China about encouraging private equity funds, Zhou added.
"We think that the first important thing is to develop faster our capital market," he said.
David Dollar, the World Bank's chief representative in China, urged Beijing to make it easier for private firms to list on the stock market and to issue bonds.
"Banks in China are performing better but there's been surprisingly little reform in banks' behaviour: They are still making traditional collateral-based loans to large firms. A lot of small firms are not getting access to lending," Dollar told the conference.
He said China's 700 listed firms generated only 15 percent of China's corporate profits, so 85 percent of the economy was not connected to the stock market at all.
"Domestic private firms are at the heart of the Chinese economy and their links to financial markets at the moment are somewhat weak," said Dollar, who also expressed concern at the high price-earning ratios of those companies that are listed. (Additional reporting by Susan Fenton)
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