Governor Zhou Xiaochuan of the PBoC said in a speech today that there is still room to use interest rates increases in the fight against inflation. This was interpreted by many as suggesting that the government does not plan to increase the appreciation rate of the currency. But he also said that China should lower its savings ratio to encourage more domestic consumption. I am not sure that increasing interest rates will lower the savings rate, unless he means he will increase the lending rate without increasing the deposit rate. Good news for banks, I guess, but not for depositors struggling with inflation.
In today’s Bloomberg I saw an interesting related comment:
Li Deshui, China’s former statistics chief, voiced concern over “excessive expectations” for yuan appreciation. Premier Wen said China will strengthen monitoring of cross-border capital inflows as part of a move to curb money growth. “Dollars outside of China tried all ways to come in, and hot money, via both legal and illegal channels, flew in to bet on the yuan’s appreciation,” Li said in Beijing yesterday.
There is still a debate going on among banking analysts about the extent of hot money inflows into China. My read is that however you choose to interpret the numbers, the financial authorities do not act like they think there is a vigorous and legitimate debate about whether hot money inflows are a problem. They definitely seem to think the problem exists.
I have been asked to do an interview later this evening on Dialogue, on CCTV9, so my entry is very short today. If you’re interested, I think the program airs at 8 p.m. and we are expected to discuss the 11th NPC and economic policy-making. I think it is my role to be the pessimist.
