China May Switch to Raising Interest Rates, Credit Suisse Says

By Kevin Hamlin

May 6 (Bloomberg) -- China’s central bank may switch to increasing interest rates as the world’s third-biggest economy stabilizes, Credit Suisse Group AG said.

“China’s economy’s recovering quicker than the rest of the world so obviously it’s going to normalize monetary policy ahead of the rest of the world,” Tao Dong, chief Asia economist at Credit Suisse in Hong Kong, said in a phone interview today.

China is likely to keep the one-year lending rate at 5.31 percent this year and then raise it by 99 basis points in 2010, according to Tao. The central bank may reinstate quotas limiting lending by banks as early as next quarter to rein in asset-price increases after a surge in new loans, the economist said.

Bank lending rose sixfold in March from a year earlier to 1.89 trillion yuan ($278 billion) after the government dropped quotas and pressed lenders to support a 4 trillion yuan stimulus plan. The Shanghai Composite Index of stocks has climbed 41 percent this year.

New loans were likely about 600 billion yuan last month, said Tao.

China’s manufacturing expanded for the first time in nine months in April after declines in export orders moderated and investment surged because of the stimulus package, according to a survey of purchasing managers by CLSA Asia-Pacific Markets.

The official manufacturing index has shown an expansion for two straight months.

The People’s Bank of China cut rates five times in the final four months of 2008. The first was as Lehman Brothers Holdings Inc. filed for bankruptcy and the central bank followed up with the biggest single reduction since the 1997-98 Asian financial crisis.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net