28 Mar 2009
March 28 (Bloomberg) -- China has room to cut interest rates as consumer prices may end the year unchanged, the central bank said after inflation fell in February for the first time since 2002."The central bank still sees room for more rate cuts," Zhang Jianhua, the research head of the People's Bank of China, told an economic forum in Beijing today. "We haven't yet cut rates because money market rates have dropped to quite low levels and banks have abundant liquidity."
China's consumer price index may stand at zero for 2009 and the nation may escape deflation because of "strong loan growth" and the government's 4 trillion yuan ($585 billion) stimulus package to spark an economic recovery, Zhang said.
Plunging prices have increased the risk that deflation will become entrenched, prompting consumers to delay purchases, squeezing company margins and triggering wage cuts. Premier Wen Jiabao, who this month set a 4 percent inflation target for 2009, is relying on a surge in lending and the support measures to spark an economic recovery.
Wen said March 13 the nation's 8 percent growth target for this year is "difficult but possible" to achieve. People's Bank of China Governor Zhou Xiaochuan said this week that leading indicators are pointing to an economic recovery.
New Loans
China's new local-currency loans more than quadrupled in February to 1.07 trillion yuan from a year earlier, the central bank said on its Web site March 12, after it cut borrowing costs five times last year, scrapped quotas limiting lending and urged support for the stimulus plan. Vehicle sales rose 25 percent in February and urban fixed-asset investment jumped 26.5 percent in the first two months from a year earlier.
Loans continued to rise in March and the growth "isn't that much smaller" than in previous months, Zhang said today, without giving a number. "We are likely to see sustained loan growth for the rest of the year," he said. The stimulus package is showing some results, he said.
China's 6.8 percent growth in the fourth quarter from the same period a year earlier lagged behind its 9 percent expansion for all of 2008 and 13 percent for 2007. Exports have dropped, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.
The World Bank cut its forecast for China's growth this year to 6.5 percent from 7.5 percent previously. The Organization for Economic Cooperation and Development said it will reduce its estimate this month to between 6 percent and 7 percent as the global slump deepens. The International Monetary Fund sees a 6.7 percent expansion, the least since 1990.
