Wed, Feb 25, 2004 page12

• Producer prices surge in China

  OVERHEATING The latest signs of excessive inflation have prompted speculation about a rise in interest rates, although the central bank says no rate rises are planned

  • NY TIMES NEWS SERVICE
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  Further evidence emerged on Monday that the Chinese economy may be overheating, and state-controlled news media said that the central bank was considering an increase in interest rates.

  Producer prices rose 3.5 percent in January from a year earlier -- a sharp acceleration from the 1.9 percent advance in November. In one of the many peculiarities of Chinese statistics, no number for December has been released.

  The figures added a new reason for concerns about inflation. Citing three Chinese economists, one of them in the government although not with the central bank, the semi-official China Daily said in a cover article in its business section that "there is a possibility that China might raise interest rates this year to counter continually rising consumer prices and investment growth."

  While China Daily serves as Beijing's mouthpiece on issues involving Taiwan and Hong Kong and on diplomatic affairs, its business and economic coverage sometimes shows a little independence from government policies. A central bank spokesman said no rate increase was planned.

  But the broaching of the subject of an interest-rate increase, together with the reported rise in producer prices, underlines the growing debate in China over whether the country faces a serious threat from inflation.

  The consumer price index in China rose at an annual pace of 3.2 percent in January for the second month in a row, a sign that, at the very least, the deflation China suffered until late last year seems to have ended. Goldman Sachs has begun describing China as an exporter of inflation instead of an exporter of deflation.

  Hong Kong, which is now part of China but maintains considerable autonomy in its economic system, released separate figures on Monday showing that prices here have begun rising slowly again after bottoming out last autumn. Higher prices for food, clothes and other items brought in from the rest of China have played a substantial role in reversing deflation in Hong Kong.

  In a research report on Monday, Hong Liang, an economist at Goldman Sachs, said that sharp increases in the price of food, by far the biggest single component of China's consumer price index, "is reflective of rising inflation expectations" rather than changes in the actual supply of food.

  The official Xinhua News Agency quoted Yao Jingyuan, the chief economist of China's National Bureau of Statistics, as saying that inflation would stay under control at its current level.

  China is struggling to fend off higher inflation in the face of brisk growth of its money supply. Determined to prevent the yuan from appreciating against the dollar in currency markets even as foreign investment pours into the country, the People's Bank of China, China's central bank, has been issuing yuan to buy dollars on a massive scale.

  After China last August raised the amount of money that banks must set aside as reserves, the pace of increase in the money supply did slow slightly. But it continues to expand at an annual 18 percent, twice the rate of economic growth.

  The People's Bank has tried to drain some of the extra yuan from circulation by stepping up sales of government bills and notes. But this policy has had little success lately, as investors have been reluctant to buy the debt because the initial interest rate on them is capped, a step demanded by China's finance ministry to limit the cost of financing the national debt.

  China has a complex labyrinth of interest-rate regulations, with separate rates for various kinds of loans, for deposits and for bonds. The China Daily article did not say which rates might be adjusted.

  But a move to raise the allowable rates on commercial loans would be consistent with recent government warnings to banks to limit new lending in fast-growing sectors of the economy like property and steel.

  The alternative to tightening monetary policy would be to allow an increase in the value of China's currency. Chinese leaders seemed to hint at a conference on Feb. 10 and Feb. 11 that they might accept small adjustments to the currency's value, saying that they wanted exchange rates to be "rational" and "basically stable," without reaffirming the current peg at 8.28 to the dollar.

  A Chinese economist with ties to the leadership in Beijing said that one possibility would be to peg the yuan to a basket of other currencies, with the basket initially set to be roughly equal in value to the current peg. But if the dollar continued its rise of the last several trading days, then pegging the yuan now to the dollar plus several other currencies, instead of just the dollar, would cause the yuan to rise more slowly than leaving the current arrangement in place.
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