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China Behind the Curve in Raising Rates: Analyst

CNBC.com
Monday, 7 Mar 2011 | 9:51 PM ET

China may have been in the news for its tightening moves in recent months, but some experts believe the central bank remains behind the curve on monetary policy.

Brian Jackson, Senior Emerging Markets Strategist at RBC told CNBC on Monday that authorities were a "a lot more proactive in raising policy rates when inflation started to pick up" in 2007 and 2008.

China Behind The Curve: RBC
China has been slow to raise rates in the last few years due for fear of derailing the global economic recovery, Brian Jackson, Senior Emerging Markets Strategist at Royal Bank of Canada told CNBC's Oriel Morrison. He shares his expectations for further tightening.

"In 2010, they were slow to get going because they were still concerned about the situation in Europe, and perhaps a double dip recession in the U.S.," he explained. However Jackson said there has been a "greater sense of urgency" among policymakers in the last two to three months as inflationremained at elevated levels.

China's move to hike its reserve requirement ratio (RRR) for banks by 50 basis points late Friday was its eighth since 2010. That takes the amount of money banks need to park with the central bank to 19.5 percent. The People's Bank of China (PBOC) has also raised interest rates three times since the current tightening cycle began in October 2010.

Jackson is expecting "another two, and perhaps even three" rate rises in the months ahead. But he pointed out this was more a "normalization" of policy, rather than tightening.

Eugene Hoshiko

Chi Lo, CEO of HFT Investment Management (Hong Kong) expects the PBOC to be much more hawkish on both reserve ratios and interest rates. "For the RRR, there is still room for another three to four more hikes, and for interest rates, probably two hikes in the first half of the year." Click here for full interview.

The key to keeping inflationary expectations under control, he said, was to bring food prices down on a consistent basis. One way was through price controls. The other, by increasing agricultural supplies, both of which Beijing has been doing.

Andrew Freris, Senior Investment Strategist for Asia at BNP Paribas Wealth Management pointed out that with China's real deposit rates still in negative territory, he says another three 25 basis point hikes are "virtually guaranteed." China's one year benchmark deposit rate currently stands at 3 percent, while its inflation rate is at 4.9 percent.

Both Lo and Jackson also see China using its currency as a tool to battle inflationary pressures. According to RBC's Jackson there is "plenty of scope for further gains [in the yuan] over the rest of the year", as concerns about inflation "trump concerns about exports". He expects the yuan to "strengthen to 6.20 versus the U.S. dollar by the end of the year."

Lo thinks the yuan will continue to appreciate for another two years, but at a "tolerable level."
"I think they won't go too fast, about 5, 6% a year is probable." he said.

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