BEIJING - Lu Zhengwei, an economist at Industrial Bank Ltd who has successfully predicted the central bank's tightening moves on 13 consecutive occasions, said on Monday that China is likely to raise interest rates again in July.

The continuous increases lenders face in reserve requirements, the money that banks have to set aside on deposit, have emerged against a background of increasing liquidity, said Lu, referring to the money that the central bank has to pour into the market because of rising foreign exchange reserves.

"So long as the adjustment of the reserve requirement ratio aims to keep the 'pool' of liquidity unchanged, it will not lead to excessive tightening," he said.

To soak up liquidity and curb inflation, the central bank announced on June 14 that it will raise the reserve requirement by another 0.5 percentage point, which became effective on June 20, marking the sixth increase since the beginning of the year and the 12th since 2010. It has raised interest rates four times since October.

China's consumer price index (CPI), the main gauge of inflation, rose 5.5 percent year-on-year in May. That's the highest level since July 2008.

In the first five months of this year, the index rose by 5.2 percent year-on-year, 1.2 percentage points higher than the 4 percent ceiling set by the government.

But as the country tightened its monetary stance, economic activities continued to decelerate, causing widespread concern. Industrial output grew 13.3 percent year-on-year in May, down by 0.1 percentage point from the level in April. The purchasing managers' index, a key gauge of manufacturing activity, hit a nine-month low of 52 in May.

"China still needs to keep liquidity under control, and should further raise interest rates appropriately," said Lu, adding it usually takes two to four quarters for the measures to take effect.

Lu predicted interest rates will be raised one more time in July. "If China continues to increase interest rates, it will achieve the goal of curbing inflation," he said.

He said an economic hard landing through over-tightening should be avoided but currently growth is not a cause for concern.

"Judging by the current situation, the economy is indeed slowing down, but overall at a modest pace," he said, predicting the economic growth rate in the second quarter will be roughly the same as the first quarter.

In the first quarter, China reported a gross domestic product growth rate of 9.7 percent year-on-year, and a 2.1 percent increase on a quarterly basis.

China Daily

(China Daily 06/21/2011 page13)