Shanghai Daily news

China will increase efforts to mop up excess cash in the economy and may impose additional interest rate hikes to prevent overheating, central bank chief Zhou Xiaochuan said yesterday.

"We don't rule out steeper or more frequent moves if necessary," Zhou, governor of the People's Bank of China, said during an interview with reporters at the 17th National Congress of the Communist Party of China in Beijing. Controls so far "haven't been very effective," he acknowledged.

The bank will continue to use a mix of policy tools, including interest rate increases, higher reserve ratios for commercial banks and more bond sales, Zhou said.

The central bank is concerned about rising asset prices, although that isn't the sole driver of monetary policy, he said.

The country's economy grew 11.9 percent in the second quarter, the fastest pace in 12 years. Five interest rate increases by the central bank this year have failed to rein in inflation, which reached a 10-year high of 6.5 percent in August. The September rate was down only slightly, at 6.2 percent.

China isn't ready to adopt an inflation target when setting interest rates and places a higher priority on growth, Zhou said. The bank considers growth, inflation, employment and the international balance of payments in setting monetary policy.

To soak up excess liquidity and limit loan growth, the central bank has instructed lenders to set aside larger reserves eight times this year, sold more Treasury bonds to bigger banks and this week required smaller lenders to post special deposits with the central bank.

The required reserves that commercial banks must park at the central bank were raised to 13 percent on Saturday, the highest level in a decade. The benchmark one-year lending rate stands at a nine-year high of 7.29 percent.

The central bank has also raised interest rates on some mortgages and increased the minimum deposit on second homes to curb speculation and cool prices.

Zhou has become central bank governor since December 2002.

In 2005, China ended the yuan's peg to the US dollar and replaced it with a more flexible basket of foreign currencies. Since then, the Chinese currency has appreciated about 10 percent against the greenback.

"The yuan will eventually become a freely convertible currency and China will open its capital account, even if we haven't set a clear timetable," Zhou said. "China agreed in principle in the 1990s to make the yuan convertible, but we halted the plan during the 1997 Asian financial crisis."

China will discuss currency issues with the European Union during an International Monetary Fund meeting, he added.

Meanwhile, Zhou reiterated that the government has agreed in principle to allow individual investors from China's mainland to trade Hong Kong stocks. He did not specify a timetable.

"The direction is set" for the plan, he said without elaborating.