BEIJING -- China needs to raise benchmark interest rates by 0.54 percentage point very soon so as to bring the inflation-adjusted deposit rate into positive territory and prevent a further exodus of household savings into the stock market, a government economist told Reuters on Tuesday.
Zhu Baoliang, chief economist at the State Information Center, a key government think-tank, also said the yuan's effective exchange rate should be strengthened by 5 per cent a year versus a key basket of currencies.
China reported annual consumer orice inflation of 3.4 percent for May, compared with the interest rate of 3.06 percent on one-year certificates of deposit. Interest income is taxed at a rate of 20 percent, pushing real earnings from deposits further into negative territory.
"The current monetary situation is too loose. Interest rates need to be raised by two to three times this year just to make monetary policy neutral, let alone to take on a tightening stance," said Zhu.
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He said he personally advocated a 0.54 percentage point rise soon and another 27 basis point increase later this year, though three separate 27 basis point increases would also do.
On the exchange rate, Zhu said that China was not acting quickly enough in letting the yuan appreciate.
"I think the yuan's real effective exchange rate against the basket of currencies (to which the central bank refers in setting its value) should be strengthened by 5 percent a year," Zhu said.
That could be translated into an annual rise of around 10 percent in the yuan's nominal value against the dollar and 2-3 percent against the euro, he added.
The yuan has now gained a further 6.1 percent since it was revalued by 2.1 percent and freed from a dollar peg to float within managed bands on July 21, 2005.
Though a stronger yuan would pose challenges to economic growth and employment, it would also help improve the country's industrial structure by weeding out inefficient firms, Zhu said.
"And we can see that Premier (Wen Jiabao) attached a lot of importance to the upgrading of industry in his annual government work report," he said without elaborating.
FREEING ENERGY PRICES
China has been chalking up repeatedly high trade surpluses, even though authorities have adopted a mix of tools to curb exports and encourage imports -- including cutting export tax rebates, reducing import duties and curbing the processing trade in certain sectors.
The surplus jumped to $22.45 billion in May, underscoring the strong underlying momentum of export growth.
Zhu said that the new policies could show an impact in trimming the surplus in the future, but that it would be more effective for China to liberalise energy and resource prices so as to increase production costs.
Chinese manufacturers' competitive edge would be blunted as they started to pay more for fuel, water and power, Zhu said, adding that such steps would also be good for the environment.
But authorities were likely to wait until at least the autumn to carry out any fundamental reforms in those areas, primarily because of concerns over inflation but also because officials would probably be risk-averse in the run-up to a key Communist Party congress to be held late in the year, he said.
"Also, the reform will be phased in through several steps in order to prevent big shocks to the market," Zhu added.
Zhu also said that he saw annual consumer inflation growth remaining at a fast 3.3 to 3.4 percent in the coming four to five months, which will boost whole-year inflation to at least 3 percent. He sees the economy expanding by 10.5 percent this year.
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