MNI: Former PBOC Chief Economist Says More Rate Hikes Needed

By William Bi

     BEIJING (MNI) - The rate hikes Thursday by the People's Bank of China

should have occurred sooner and been larger to address the imbalances in the

current market interest rate structure, former PBOC  chief economist Ma Jun

said.

     One day after the U.S. Federal Reserve raised its main interest rate by 25

basis points, the People's Bank of China raised the interest rates on its open

market operation instruments and its Medium-Term Lending Facility (MLF) loans by

five basis points each.

     The PBOC move signals that China intends to defend the yuan exchange rate

against short sellers and stabilize the interest rate gap with the U.S., Ma

wrote in a statement emailed to MNI. Ma, now director of the Center for

Financial and Development Studies at Tsinghua University, said rates should be

raised further, if conditions allow, to balance the interest rates between the

PBOC's open market instruments and the actual costs of borrowing in China's

domestic markets.

     The rate hikes' "symbolism is bigger than their substance: it will have

limited impact," Ma said. The PBOC refrained from raising the required reserve

ratios, the amount of money lenders must hold at the central bank, after

considering the uncertainties in the economy, Ma said. Yet the modest PBOC rate

moves hint that it won't tolerate increased leverage or an excessive expansion

of broad lending, Ma said.

     The U.S. Federal Reserve will likely raise interest rates faster and more

frequently next year given the stronger-than-expected U.S. economy and the

heightened risks of inflation, Ma predicted. Combined with the effect of lower

tax rates, the dollar index will likely rise, pressuring other currencies

including the yuan, said Ma.

     To counter these mounting challenges, China will need to further reduce

taxation and other administrative costs on businesses, as well as further reform

the services and financial sectors to attract more foreign investment, Ma said.

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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