China likely to cut rates as economy cools

China may cut, rather than increase, interest rates over the rest of this year as it seeks to stave off a sharp economic slowdown, a prominent Chinese government economist said on Wednesday.

Wang Jian, a researcher with the National Development and Reform Commission, a top planning agency, said the relaxation of monetary policy would become visible in the final quarter of 2011.

“The central bank will be very cautious about raising interest rates. In fact, I believe it may stop raising interest rates but cut interest rates in the second half of this year,” Wang told Reuters in an interview.

Wang said that fixed-asset investment, the key engine of economic growth, will soon run out of steam as spending on new projects has fallen. But for the time being, fixed-asset investment in the first four months showed healthy annual growth of 25.4 percent, accelerating in April.

He added that fewer investment projects, coupled with weak consumer demand and unstable exports, may force Beijing to rethink its macro-economic policy. For now, the government regards controlling inflation as its top economic priority.

“The question is there whether China should continue its anti-inflation campaign while the growth momentum is waning,” Wang said.

The People’s Bank of China has raised interest rates four times since last October and banks’ reserve requirements seven times, tying up funds that could otherwise have become loans.

China’s inflation eased a touch in April to 5.3 percent and other data, including industrial output and loans, pointed to slower activity in the Chinese economy and less room for further aggressive moves to tighten monetary policy.

Wang, who provides policy advice to the government, said China’s monetary policy had limited impact on taming inflation because prices were rising for structural reasons, such as higher labor costs, that can’t be addressed by interest rate changes.

He said that the central bank would still raise banks’ reserve requirements, but he said this was more a tool for mopping up excess cash streaming into the economy than a form of tightening.
Source: Reuters

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