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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
     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:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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