The World Bank this week told China to lift interest rates again and upgraded its 2011 growth forecast a day after the country’s central bank hinted that a change in monetary policy was around the corner.
The urging on rates came as the Bank said it now expected Chinese economic growth to be 10% this year, up from the previous estimate of 9.5%.
In saying China needed to raise rates, the World Bank picked up on the hint from the People’s Bank’s latest quarterly Monetary Policy Statement and suggested China could see a further normalisation of monetary policy next year (code for rate increases).
The World Bank said China should raise interest rates and allow a stronger Yuan to dampen inflation, along with watching capital flows to prevent the sort of surge seen in the third quarter of this year.
“Further normalization of the macroeconomic stance is needed to guard against macro risks,” the bank said in a periodic report on the Chinese economy released this week, citing asset-price gains, bad loans and “strained” local-government finances.
“Interest rates will need to rise further,” the World Bank said.
In the latest China Quarterly Update, a regular assessment of China’s economy, the World Bank predicted that China’s GDP growth in 2011 will slow to 8.7% and then ease somewhat further in the medium term.
It forecast that higher food prices could see inflation may stay above the 3% target set by the Chinese government for 2010 for longer than wanted.
But it also pointed out that inflation was not really a concern because underlying price pressures were moderating.
The comments on interest rates and monetary policy came after the People’s Bank released its latest Monetary Policy statement this week.
It said it would continue the moderately loose monetary policy and make it better-targeted and more flexible in the coming months of this year (the latter point is new).
The PBOC said it would gradually normalize the monetary policy from its counter-crisis mode and tighten control over liquidity to maintain moderate credit growth in the coming months of this year (also new and taken to hint at rate rises in 2011).
The central bank said it would gradually implement market-orientated reform of interest rates and keep the exchange rate basically stable.
In addition, the central bank said uncertainties about price trends were increasing and capital inflows would increase as developed economies recovered from the financial crisis.
The central bank has already increased bank reserve requirements four times in the past year and lifted interest rate once, last month, in a complete surprise.
Now, according to the World Bank, that rise should be repeated.
And according to economists at Credit Suisse, it could very well be.
They picked up on the new wording in the statement (as translated on official news websites).
Credit Suisse said this new wording marks a “change in thinking” by policy makers about the “priority in boosting growth, enhancing structural changes and managing inflation, and seems to be consistent with the unexpected rate hike” last month.
Credit Suisse says the new emphasis seems to be a message that more rate rises could happen in China in the coming year.
The World Bank said it also sees the 2011 growth rate hitting 8.7%, up from the previous forecast of 8.5%. (US bank Goldman Sachs said this week it sees Chinese growth of 10.1% this year and 10% next year.)
The World Bank says China’s economic prospects remain "sound".
"The Update notes that, despite an expected deceleration, global growth prospects are fairly favourable due to emerging market strength," the World Bank said.
"However, risks remain, including a weaker outlook in high income countries. Global price pressures remain contained by spare capacity in many countries, but raw material prices have risen again and there are upward inflation risks internationally."
In other words, there’s no real threat to China’s continuing solid growth.
China’s central bank also gave a big hint that it’s planning fresh measures to attack rising asset prices, especially in the property sector.
It said this week that property-market speculation and inflation expectations were the targets of last month’s rate increase.
It’s a repeat of a warning of last month when Zhou Xiaochuan, governor of China’s central bank, said the risks of excessive liquidity, inflation, asset bubbles and bad loans will "increase significantly".
China releases its October trade, production, inflation and other economic data next week.
