China's efforts to rein in economy may not be enough (News Feature)

Feb 9, 2011, 13:03 GMT

By Andreas Landwehr, dpa =

Beijing (dpa) - With base rate hikes and stricter controls on lending capital, China is trying to rein in its economy. But experts fear the measures may not benefit consumers enough to curb inflation.

On Tuesday, the People's Bank of China raised its lending and deposit rates by 25 base points each, to 3 per cent and 6.06 per cent, respectively.

'Frankly I don't think raising rates will reduce inflation,' said Michael Pettis, professor at Beijing University's Guanghua School of Management.

'Most credit in China goes to producers, real estate developers and infrastructure investors, and almost none goes to consumers,' he said.

In particular, raising the rates 'has little impact on demand for those items - mainly food - that are driving inflation,' Pettis told the German Press Agency dpa.

Food prices rose 7.2 per cent in 2010, contributing significantly to the overall 3.3-per-cent inflation rate. Severe drought, and high demand ahead of the New Year's festivities in early February, pushed grain prices up 16 per cent year-on-year in January.

Some estimates predict overall inflation to reach 5 or 6 per cent for the first six months of the year.

After pulling out of the global recession faster than most other countries, the world's second-largest economy is now in danger of overheating.

Gross domestic product grew 10.3 per cent in 2010, and is expected to put out a very respectable 9-per-cent increase this year, even in the face of further monetary restrictions.

In the coming weeks, experts expect a further tightening of monetary policy, either a further raise in base rates or an increase in the capital requirements for lending banks.

But the restrictions on lending are unlikely to prick the real estate bubble, experts say. With credit still relatively cheap, and capital gains high, speculation is still rife on the housing market.

Many new properties are not even rented, in order to facilitate their rapid resale.

Beijing could be pandering to public concerns. The central bank's hike earlier this week was a signal that it is serious about fighting inflation, and could be aimed at calming fears ahead of the National People's Congress in March.

Over two weeks from March 5, the delegates are to approve the next five-year plan through 2015. High on the agenda will be a stimulation of national demand, a more sustainable economic growth model, the improvement of rural incomes and the increase of investment in the relatively backwards west of the country.

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