China Should Boost Interest Rates Amid Property `Danger,' Adviser Li Says

China needs to extend interest-rate increases and allow the yuan to gain by about 5 percent annually to combat inflation and avoid fuelling asset bubbles, said Li Daokui, a central bank monetary policy committee member.

“We should gradually increase rates in the first and second quarter,” Li said in an interview at the World Economic Forum in Davos yesterday. Rising real-estate prices are the “biggest danger,” he said.

China has raised benchmark lending rates twice since mid- October and the State Council last night expanded a crackdown on real-estate speculation by increasing minimum down-payments for second homes. Citigroup Inc. forecasts that the central bank may raise rates and reserve requirements for lenders before or during a Lunar New Year holiday starting Feb. 2. The one-year lending rate is 5.81 percent.

The yuan non-deliverable forwards traded at 6.4475 at 2:42 p.m. in Hong Kong, near its 2 1/2-year high. The forwards reached 6.3920 per dollar on Oct. 18, the strongest level since July 18, 2008.

Asian countries are battling inflation pressures as food and commodity costs climb and foreign capital inflows spur asset-price increases. China’s currency reserves swelled to a world-record $2.85 trillion last year and domestic bank lending breached a government target, pumping more money into the fastest-growing major economy.

China may allow more gains in the yuan to contain consumer prices and ease trade tensions. The Chinese currency closed at 6.5819 per dollar yesterday, after President Barack Obama said last week that it remains undervalued.

‘Excessive’ Yuan Gains

While an annual gain of 5 percent to 6 percent in the yuan is acceptable, any “excessive” appreciation would hurt Chinese exporters, said Li, who’s an academic adviser to the People’s Bank of China.

Most global investors see a bubble in China, a Bloomberg poll shows. Fifty-three percent of respondents held that view in a quarterly survey of 1,000 Bloomberg customers who are investors, traders or analysts.

One area of concern is the property market, with an International Monetary Fund study last month indicating that luxury home prices in Beijing and Nanjing and mass-market prices in Shanghai and Shenzhen have become “increasingly disconnected from fundamentals.” Premier Wen Jiabao said Dec. 26 that curbs on the housing market “were not well implemented” last year.

‘Aggressive’ Policies

The State Council yesterday increased the minimum down- payment for second-home purchases to 60 percent from 50 percent and said local officials will be held accountable if they fail to set and meet targets for limiting house price gains.

The latest measures were “more aggressive than expected,” Deutsche Bank AG said in an e-mailed note today.

Consumer prices rose 3.3 percent in 2010, breaching a government target of 3 percent. Across 70 cities, property prices rose 6.4 percent in December from a year earlier.

China won’t suffer a “hard landing,” Li said. Its economy will grow about 9.5 percent this year and the average inflation rate will be 3.8 percent to 4 percent, he forecast.

China’s economy expanded 10.3 percent in 2010, the fastest pace in three years, after growing 9.2 percent in 2009. The nation’s standing as the No. 2 economy may be confirmed on Feb. 14 when Japan reports fourth-quarter gross domestic product.