PBOC Hints At More Rate Hikes; Warns Against Asset Bubble

In a strong indication that China's central bank will continue tightening monetary policy, People's Bank of China Assistant Gov. Yi Gang said Friday policymakers will resolutely curb inflation and prevent negative real interest rates.

"Negative (real) interest rates in the long term are a distortion to the economy, and aren't good. We should try our best to avoid it," Yi said on the sidelines of an economic forum. He added reversing negative real rates takes time. Yi also said during a speech at the forum that an asset bubble could cause problems, a signal that Beijing remains concerned about soaring share prices. Yi's comments highlight the challenges that the PBOC faces in curbing inflation and taming a stubborn stock market that has so far defied previous rate hikes. Domestic liquidity remains flush because of China's large trade surplus, which also fuels expectations of further yuan appreciation that encourage even more funds to flow into the country. The PBOC Wednesday raised benchmark lending and deposit rates for the fourth time this year, after the consumer price inflation rate rose to a 10-year high of 5.6% in July. The rate hike brought the one-year lending rate to 7.02%, and the one-year deposit rate to 3.60%. Yi said negative real interest rates over the long term could hurt the economy. He added the "central bank's determination to control inflation is unwavering." Low real lending rates fuel investment, raising the risk of excess production capacity, while low or even negative deposit rates encourage local residents to take money out of bank accounts and invest them in the local stock and property markets. China's benchmark share index has continued to post record highs. It crossed the 5000 points level Thursday to close at an all-time high of 5032.49. China should also prevent overly large capital inflows, Yi said. In recent months, China's foreign-exchange regulator has said it will step up checks on funds flowing illegally through trade channels, for which China doesn't have foreign-exchange controls. Yi also reiterated that capital account convertibility is an eventual goal. Earlier this week, the State Administration of Foreign Exchange said it authorized a trial allowing Chinese residents for the first time to directly invest in securities products in Hong Kong, marking a step toward convertibility. But Yi also said China should ensure orderly capital outflows, suggesting that further easing in its capital controls will be gradual. Yi added Asian countries should prevent risks linked to large trade surpluses and strong currencies.