China May Delay Interest Rate Rises Until 2012

By Sophie Leung and Eunkyung Seo - Aug 10, 2011 8:26 AM GMT+0800

China may join Asian nations from South Korea to India in delaying interest-rate increases after the nation’s leaders urged global cooperation to stabilize financial markets.

The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed yesterday. Economists’ median forecast is for South Korea to extend a pause for a second month tomorrow, while Indonesia stayed on hold yesterday.

The U.S. Federal Reserve pledged yesterday to keep interest rates near zero through mid-2013 and use other policy tools “as appropriate,” addressing the slump in confidence that triggered a global stock rout. China’s State Council said “relevant nations” should adopt responsible fiscal and monetary policies to maintain investors’ confidence, in a statement yesterday evening after a meeting chaired by Premier Wen Jiabao.

“We have an increased risk of a global recession, so China will not raise rates now,” said Wang Tao, a Hong Kong-based economist for UBS AG, who previously worked for the International Monetary Fund. China’s inflation has peaked and “food prices are already correcting,” she said.

China’s consumer prices climbed 6.5 percent in July from a year earlier, the fastest pace since 2008, a report from the Beijing-based National Bureau of Statistics showed yesterday. That was more than the 6.4 percent median estimate in a Bloomberg News survey.

Industrial Production

A slower-than-estimated 14 percent gain in industrial production added to signs that moderating economic growth may assist in limiting price pressures. Sliding commodity costs may also help.

The State Council’s statement dropped previous language describing the fight against inflation as the nation’s top priority and policy makers are likely in a “wait-and-see mode,” Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch said in an e-mailed note.

U.S. stocks jumped the most in more than two years, rebounding from the worst drop since 2008, after the Federal Reserve statement. Shanghai’s stock index was little changed yesterday after a two-day plunge of almost 6 percent.

Facing ‘Chaos’

“Usually the Chinese government stops doing anything when there’s chaos around, that’s the instinct,” said Andy Xie, an independent analyst who was formerly Morgan Stanley’s chief Asia economist. Interest rates will be “on hold for the time being, until global markets are recovering,” he told Bloomberg Television in Hong Kong.

The nation’s key one-year lending rate is 6.56 percent after three increases this year, the most recent in July.

The cost of pork, a Chinese staple, rose 57 percent in July from a year earlier, highlighting the risk that rising prices will lead to social instability. In signs of unrest this year, a dispute between a street vendor and authorities in Guangdong province in June led to protests during which crowds overturned cars and threw bottles at police.

For the auto industry, inflation may mean slower sales growth, said Matthew Tsien, executive vice president of General Motors Co.’s China unit.

“What it will lead to in the near term may be more modest levels of growth, maybe even flat growth for a period of time,” Tsien said in an interview in Chengdu yesterday.

Tightening ‘Interrupted’

Group of Seven nations and the G-20 pledged this week to take all necessary measures to stabilize financial markets and foster economic growth in a bid to head off a collapse in investor confidence. China, the world’s biggest exporter, relies on demand in the U.S. and Europe.

Chinese officials told the International Monetary Fund last month that the nation’s monetary tightening since the global financial crisis had been “interrupted” for about six months by heightened sovereign-debt risks in Europe.

UBS, Societe Generale SA, Nomura Holdings Inc., HSBC Holdings Plc, Standard Chartered Bank, Citigroup Inc., Daiwa Securities Capital Markets Ltd. and Mizuho Securities Asia Ltd. expect no rate increases in China this year, while Royal Bank of Canada and Barclays Capital still see a move as likely.

Ten of 15 economists expect South Korea’s central bank to leave the benchmark rate unchanged at 3.25 percent after its monthly monetary policy committee meeting, while five forecast a quarter-point increase. Goldman Sachs Group Inc., DBS Bank Ltd., Barclays Capital, and Moody’s Economy.com dropped calls for an increase after equity markets plunged.

Suppressing Consumption

South Korea’s consumer prices rose 4.7 percent last month from a year earlier, the biggest gain in four months.

“The sharp decline in the equity markets themselves, if not reversed soon, could generate its own downturn momentum, suppressing consumption and delaying or cutting back investments,” Goohoon Kwon, a Seoul-based economist at Goldman Sachs, wrote in a note after pulling his call for an interest- rate increase. “Current market conditions point to high risks of less hikes or even rate cuts.”

In India, a rally in bonds has signaled that investors no longer expect an interest-rate increase as soon as next month. R. Gopalan, secretary of economic affairs at the Finance Ministry, said Aug. 7 that an easing of commodity prices as the global economy slows may cut inflation.

“The probability of a rate hike from the Reserve Bank of India has become very, very low,” said Manish Wadhawan, Mumbai- based head of interest-rate trading at HSBC Holdings Plc. “Nobody’s expecting a rate cut in the near future, but it could very well be a pause situation.”