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BIZCHINA / News

Further rate hike urged

(Shenzhen Daily)
Updated: 2007-07-25 08:55

China needs to raise interest rates further to reduce the risk of
liquidity-fuelled asset bubbles, a government think tank said yesterday.

The Macroeconomic Research Institute, a think tank under the National
Development and Reform Commission, said the central bank could raise
interest rates more than once before the end of the year to curb
excessive money supply growth.

“Monetary policy should consider asset prices — it should especially
monitor fluctuations in property and share prices and include them among
policy targets,” the think tank said in a full-page report in the
official China Securities Journal.

China raised interest rates Friday for the fifth time since April 2006 to
slow an economy that grew 11.9 percent in the second quarter from a year
earlier.

The institute said that, while the Central Government was trying to apply
the brakes, local governments were pressing on the accelerator because
they depend heavily for their revenues on taxes generated by investment,
especially in urban infrastructure.

To that end, China needed to overhaul its system of fiscal transfers and
create different political incentives for local officials, who are now
largely assessed on their ability to deliver growth, the institute said.

Low interest rates could fuel asset inflation, which, along with
continued expectations of yuan appreciation, would attract more overseas
capital, the institute warned.

To curb real estate investment, it urged the government to levy a general
property tax as soon as possible. People who buy second homes should be
required to make higher downpayments and pay higher mortgage rates, it
added.

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