Possible Rate Hike in China as Economy Recovers

An adviser from the central bank in China has hinted at a possible rate hike as the economy strengthens. Interest rates have steadily increased on par with growth, said People’s Bank of China (PBOC) adviser Sheng Songcheng during an interview with Reuters. “The economy is improving…so interest rates and prices will move in a positive direction,” Sheng said. “Under the right circumstances, if conditions allow, we can consider a rate hike.” The Chinese economy began the year slowly, but it was eventually able to meet up to the government’s expectations for the first three quarters. The growth rate of 6.7 percent during the first nine months was within the target of 6.5 percent – 7percent. The last quarter is expected to close even stronger. Sheng expects the rate increase will help solidify the progress in the market this year.

The rate hike is also expected to help stabilise the exchange rate of the yuan, which has suffered its worst slide against the dollar in over two decades. It is the worst performing currency in the major Asian markets. “In the past two years depreciation pressure on the yuan has been high, but (China) hasn’t changed foreign exchange management rules. If you change the rules now, there will be market panic,” Sheng added.

“To stabilise the forex rate, you need to strongly emphasise to everyone, ‘I won’t change (the rules)’,” he said. The PBOC adviser also supports the government retaining the $50,000 annual foreign exchange quota for individuals, though he thinks the government should use its foreign reserves to support the yuan. The growth spurt has also brought about an increase in inflation, but Chinese economists don’t believe it will justify a rate hike.