China rate rise talk builds as loans, inflation rise

By Zhou Xin and Simon Rabinovitch, Reuters

BEIJING–China is likely to raise interest rates in the coming days in a demonstration of the government’s resolve to tame inflation, an official newspaper said on Tuesday. In a banner headline across its front page, the China Securities Journal said this weekend offered a “sensitive window” for a rate rise, which would be the country’s second after a surprise increase in October, the central bank’s first rate hike since 2007. An increase in rates would also put flesh on the bones of Beijing’s announcement late last week that it was switching to a “prudent” monetary policy from the “appropriately loose” stance of the past two years.

The report weighed on Asian stock markets in early trade, though the country’s main index in Shanghai later pared losses. Chinese asset markets have tumbled in recent weeks as investors have priced in more tightening. The newspaper said the timing was right for a rate rise with official monthly economic indicators, notably the consumer price index (CPI), likely to show an increase in inflationary pressure when released on Monday, Dec. 13.

“With reference to the central bank’s record of raising interest rates just ahead of the release of CPI, this weekend will provide a window for a possible policy change,” the newspaper said, without citing any source.

China’s CPI in November may have accelerated to a 27-month high of 4.7 percent from a year earlier, according to a Reuters poll, up from a 4.4 percent pace in October.

“The general trend of China’s monetary policy is appropriate tightening on the basis of the previous extremely loose stance,” said Chen Jiagui, a senior government economist.

Traders in China’s interbank market said big lenders have already prepared enough money for another 50 basis point increase in banks’ required reserves, which are already at a record high for big banks.