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Zhou: Interest rates to stay 'relatively low'
(Bloomberg.com)
Updated: 2005-06-26 20:18

People's Bank of China Governor Zhou Xiaochuan said the country will keep interest rates "relatively low" to help boost consumer spending and eliminate a trade surplus that has led to tensions with Europe and the U.S.

China's central bank chief Zhou Xiaochuan revealed the country will keep interest rates "relatively low." [newsphoto/file]

"For the time being, we probably won't increase interest rates", Zhou, 57, said in an interview in Basel, Switzerland, where he's attending a meeting of central bankers at the Bank for International Settlements.

Consumer prices "are stabilizing," easing pressure to raise rates, he said.

China is trying to boost consumption and imports to reduce its $30 billion trade surplus so far this year, which the US and Europe say has been boosted by China's decade-old peg for its currency, the yuan.

Chinese Premier Wen Jiabao said June 26 more time is needed before any changes can be made to the peg, which fixes the yuan at about 8.28 to the dollar.

The People's Bank of China lifted its one-year lending rate by 27 basis points to 5.58 percent on Oct. 29, 2004, to curb pressure on prices.

The Institute of International Finance in May forecast China's economic growth this year may match 2004's 9.5 percent. China's official target is a growth of 8 percent.

"Raising interest rates isn't an effective tool to address overheating," said Qu Hongbin, a senior economist at HSBC Plc in Hong Kong.

"The central bank has done a good job curbing lending and loan growth. As long as that continues, there's a good chance investment will slow. That's why Zhou's cautious about talking about raising interest rates."

Retail Sales Rise

China's retail sales rose 12.8 percent in May from a year earlier, accelerating from growth of 12.2 percent in the previous month, as higher incomes spurred spending on products from televisions to beer.

Rising consumer spending is helping sustain growth in the world's seventh-largest economy, which expanded 9.4 percent in the first quarter, as the government restricts investment in manufacturing and real estate.

"The clear sign of an overheating economy is higher prices," Zhou said. "China's prices are partly driven by international factors. Generally speaking, China's prices are stabilizing."

China's inflation rate held at a 19-month low of 1.8 percent in May.

The average inflation rate this year is likely to fall to between 3.0 percent and 3.5 percent this year, from 3.9 percent in 2004, the People's Bank of China forecasts.

China's fixed-asset investment gathered pace for a third month in May as more power plants and railways were built to reduce blackouts and ease transport bottlenecks in the world's seventh-largest economy.

Investment in urban areas rose 26.4 percent from a year earlier to 1.97 trillion yuan ($238 billion) in the first five months.

"It's hard to say whether China's economy is overheating," Zhou said. "The higher investment in May still needs to be monitored."

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