China to raise rates to avert risk of liquidity

By Staff
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Google Oneindia News

Beijing, July 24: China needs to raise interest rates further to reduce the risk of liquidity-fuelled asset bubbles, a government think-tank said on Tuesday.

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 on Friday for the fifth time since April 2007 to slow an economy that grew 11.9 per cent 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 high mortgage rates, it added.

Reuters>

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