China needs to tighten policy, says top economist

China needs to tighten policy further by raising interest rates again, increasing banks' reserve requirements and permitting a more flexible exchange rate, an influential government economist said on Saturday.
The People's Bank of China (PBOC) raised its benchmark one-year lending rate for the first time in 18 months on April 27, to 5.85 percent from 5.58 percent, after annual economic growth accelerated in the first quarter to 10.2 percent.
The central bank also instructed banks to rein in credit, while the National Development and Reform Commission (NDRC), the top planning agency, reinforced curbs on investment in a clutch of sectors suffering excess capacity.
Ba Shusong, vice-head of the financial research institute at the Development Research Centre, a think-tank under the State Council, China's cabinet, said the rate rise had had only an announcement effect and no real impact on the economy.
"The measures taken by the government are only a first step. I expect more tightening measures in the future," he told a financial forum.
Ba said the impact of the increase in borrowing costs would be limited because of the growing financing role played by China's capital markets and because big banks are now well capitalised and so are in a good position to lend more.
He said excess liquidity was at the root of all China's economic problems. This had led the PBOC to keep its benchmark one-year deposit rate unchanged at 2.25 percent, in order to deter capital inflows that add to the excess liquidity, even as it raised its lending rate to cool investment.
These two actions were contradictory, Ba argued. The answer, he suggested, was to combine increased interest rates and higher reserve requirements to deter lending with a more flexible exchange rate.
Participants at the forum agreed that China was experiencing excessive credit and investment growth and that high property prices were a cause for concern.
"Look at the growth rates for investment, infrastructure and urbanisation, they're unprecedented. It obviously shows an overheating economy," Wang Dayong, a senior official at China Development Bank, one of the country's policy lenders, said.
He disclosed that the government had already clamped down on the common practice whereby banks sign long-term "strategic" lending deals with Chinese provinces or cities.
For instance, the mayor of Shenzhen, a boom town over the border from Hong Kong, told Reuters last month China Construction Bank had offered to lend his city up to 100 billion yuan.
Wang said five government departments issued a circular last month voiding all such contracts signed since January 15.