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By Dai Yan (chinadaily.com.cn)
Updated: 2007-09-21 15:53

The Consumer Price Index (CPI), a barometer of inflation, will likely continue to rise slowly until 2009, and China is also expected to raise interest rates and the deposit reserve ratio again within the year, said an economist.

China's CPI has been driven up mainly by rising pork prices, but the situation will not last long because pork prices are expected to stabilize, said Wang Zhihao, an economist with Standard Chartered Bank (China) Limited.

Related readings:  ADB: China's GDP growth to hit 11.2%, CPI to top 4% in 2007  5th interest rate hike to drain excessive liquidity  CPI to rise at moderate rate, still under control

The CPI rose 6.5 percent year-on-year in August, the biggest monthly rise this year, after a 5.6 percent increase in the previous month.

"Now we are worried about manufacturing prices rising, which may be propelled by increases in raw material prices and labor costs as well as the low efficiency of outdated machines," said Wang.

Price hikes in the manufacturing industry will have a greater impact on the country, especially when the CPI is going up, according to Wang. Enterprises will have to raise salaries, adding to inflationary pressures.

Wang forecasted China to raise the one-year loan interest rate once again this year to 7.65 percent, and the deposit reserve ratio once or twice more to 14 percent.

China has raised the one-year benchmark interest rates five times this year in a bid to curb rising inflation and control excessive liquidity. In its latest move, on September 15, the central bank raised one-year deposit and loan interest rates by 27 basis points to 3.87 percent and 7.29 percent respectively.

The central bank will be in a dilemma, said Wang. On the one hand, deposits are flowing into the stock markets and real estate because of low deposit interest rates. The best solution is to narrow the interest spread.

On the other hand, narrowing the interest spread will affect Chinese banks' second-half profits, as many listed banks' first-half income from the interest spread accounted for more of their total, Wang added.

Continuous interest rate hikes have increased the burden of housing mortgage loan borrowers, and banks are loose in inspecting of borrowers' qualifications. These create banking industry risks in housing loan business.

But Chinese banks will not be struck with a crisis like the subprime crisis in the United States, because housing loan borrowers do not need to offer dawn payments in the US as they in China, Wang noted.

Wang also urged individual real estate and stock investors to consider interest rate risks besides market prices. Otherwise they will possibly suffer lower life quality due to increasing monthly payments.