CHINA should take an extremely cautious approach in adopting new austerity moves in the second half of the year as its economy faces major domestic and external uncertainties, officials and analysts said.
Many observers noted the central bank may introduce one interest rate hike for this year and allow the yuan to rise by a smaller-than-expected clip to ensure a sustainable recovery. They also believed that worries over a double-dip recession have already exceeded those over economic overheating as the European debt crisis spreads and domestic investment eases.
"The dramatic changes in policies are set to cast a negative impact on the sustainable performance of the economy," said Xu Lianzhong, a senior official with the National Development and Reform Commission, China's top economic planner.
"The country still faces weak private investment and uncertainties in domestic consumption and exports," he said in an article published yesterday in the official China Securities Journal.
Market sensitive
China has taken several steps this year to limit loans to speculators in the housing market, penalize land-hoarding developers and raise the reserves banks must park with the central bank as it acts to rein in overheating.
However, the recent debt crisis in Greece and slower growth in domestic industrial output and fixed-asset investment have stoked jitters that further tightening may have more side-effects on economic growth.
"The market is quite sensitive about policy adjustments, especially when the European debt crisis is spreading," Xu said, adding inflation was not a major risk to the economy.
China's consumer prices rose 2.8 percent last month, the fastest pace in 18 months. It has been above the benchmark one-year deposit rate of 2.25 percent for three straight months.
The rise in the consumer price index, a major gauge of inflation, was largely due to a low base in the same period last year and driven by a jump in food costs, economists said. The NDRC said last week the CPI rise may average 3 percent in May and June.
Economists at Soochow Securities forecast the rise in consumer prices may peak at 4.2 percent in July before easing to less than 3 percent toward the end of this year.
They noted that an interest rate hike of 0.27 percentage point, probably in July, will help ease inflationary expectations, helping the central government to reach the annual target of 3 percent for the CPI rise.
Data key to rate rise
Zhang Jing, an analyst at Huatai United Securities, predicted that the central bank may raise interest rates after first-half economic data are unveiled in July in response to the expected strong economic growth.
"However, if no rate hike occurs at that time, it shows authorities are pessimistic about economic growth and no further tightening would be expected," Zhang said.
The central bank will likely raise the benchmark deposit rate by a bigger amount than the lending rate to curb inflation and ease the move's impact on corporate borrowing expenditures, Zhang added.
As the external economic scenario grows murky, a fast appreciation of the yuan will likely hurt exporters and increase capital inflows, which could destabilize the domestic economy, according to analysts.
"It's reasonable for the central government to increase the yuan's trading band or peg it to a basket of currencies instead of to the US dollar in the coming weeks," said Wu Ke, a Zhongtian Investment Consulting Co analyst. "But a rise of more than 5 percent in the yuan's value is something unlikely to happen if the European economy stays weak."
Standard Chartered Bank also said yesterday that China may wait until the third quarter to resume the yuan's appreciation.
Europe's debt crisis had led to an accelerated rally in the yuan's real effective exchange rate, with the currency rising about 7 percent against the euro since April 19, the bank said.