The People's Bank of China recently raised its one-year deposit by 27 percentage points and the one-year lending rate by 18 basis points. And it announced at the same time it would again raise the rate of deposit reserve ratio by 50 basis points on June 5. Moreover, it enlarged the fluctuation area of the Remenbi (RMB)-US dollar peg by 0.5 percentage points, either on positive or negative, from May 21. The joint use of these tools -- interest rate, deposit reserve ratio and exchange rate (or three joint moves) -- has indeed been rare in the course of China's macroeconomic regulation. On this topic, People's Daily reporter Li Xia had an exclusive interview with Yu Yongding, director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences. The questions and answers of the interview are as follows:

Q: How do you look at the effect of the current macroeconomic regulation and control?

Yu: The signal transmitted by the "three joint moves" of the central bank is lucid and totally correct. Their role of publicity is bigger than their essential role though the intensity of each move is not so big. The direction of the central bank's policies in recent months show that China's monetary policy is still heading for the direction of inclined tightness this year and the exchange rate is moving toward the direction of increasing its market role. So the policies and measures that can and should be used include the monetary policy, financial policy, management of trans-border capital flow, financial supervision and control, the development and reform of the capital market, and the ownership reform of the state-owned enterprises.

Q. While the achievements of China's economic development have captured global attention and instability represents the prominent problem, then in what aspects is it manifested?

Yu: The outstanding problem of Chinese economy is instability and disequilibrium. At present, its outstanding problem is the rapid rise of stock prices. The increase range of Chinese stocks has been more doubled in less than two years since September 2005. Stock index recently raised from 3,000 points to 4,000 points. And millions of ordinary people poured saving deposits into stock market. Once stock bubble bursts, it would mean an immeasurable blow to economic and social stability.

On the other hand, China's trade surplus continues to enlarge. If such a situation cannot improve, the trade frictions between China and the United States, between China and European Union and between China and other nations will possibly further intensify, and will give rise to a negative impact on the Chinese trade and economic growth. Consequently, it is essential for China to increase its flexibility with RMB exchange rate.

With a trend to rise since the last quarter of 2006, China's inflation rate has topped a three-percent level, a level China should not exceed, generally speaking.

Furthermore, the fixed asset investment rate is too fast and, so far, there has been no obvious marked improvement with high energy consumption and grave environment pollution, which could have a trend to possibly worsen in some aspects.

Q. What are the causes for the stock market bubble and accumulated risks?

Yu: Assets bubble and the disequilibrium of balanced of international payment further deteriorates, the rate of the fixed asset investment is still on rise excessively and inflation has surfaced. These problems, however, are interrelated, in spite of different causes for their occurrence. The direct cause for the current bubble and accumulate risks with Chinese stock markets is a question of excess fluidity.

First of all, the increase rate of China's currency has for long surpassed that of GDP, and the country's ratio between M2 and GDP was more tan 160 percent, the highest in the world. Veteran economists have often referred the ratio between M2 and GDP to "a tiger in cage". In the past, inflation was anticipated to stay at a low level, so "the tiger" has been confined "to the cage" for a dozen years and more. To date, with the soaring of stock prices, residents have begun pouring their saving deposits into stock market.

Second, due to the China's ever-increasing trade surplus and capital surplus, the central bank, in a bid to maintain the stability of the RMB exchange rate, has to meddle in the foreign exchange market by buying US dollars and releasing RMB yuan and thus resulted in new excessive fluidity.

Despite repeated interest increases, the interest rate in name has been kept at a very low level, and the rise of inflation rate has in fact obliged the interest rate in essence to further drop. With a lack of new, heated consumption growth areas or other channels of investment, large amounts of capital flow into stock market and real estate market, so the skyrocketing of share prices is hardly avoidable.

Moreover, the drastic rise of China's assets prices (first real estate and then stock shares) has become a vital, essential factor for the inflow of speculating capital from overseas in recent years.

Q. What do you think where the advantages of the "three joint moves" taken by the central bank lie?

Yu: The "three joint moves" the central bank has introduced indicate its resolve to safeguard economic stability and balanced growth. It is the duty of the central bank to contain the further increase of excess fluidity and absorb the existing excess fluidity. Therefore, the policy tools to this end include an increase of the reserve fund ratio, the issue of more bank bills, and an increase in both interest rate and exchange rate. If only a single tool is exploited or used, it might bring about an excessive lash to a certain economic entity.

The costs for China's macroeconomic regulation should be shared rationally by various social strata, trades and enterprises of different industries. Besides, as the problems we face are interrelated, so it is necessary to resort to all kinds of methods simultaneously.

Another hallmark in the central bank's regulation lies in differentiating the increase range for the interests of both saving deposits and loans. The excessive-low deposit interest is a major reason for the transfer of people's saving deposits into the stock market, and the raising of saving deposit interest could possibly ease the pressures on stock market, whereas a lesser increase of loan interest has mainly taken the interests of economic entities into account. Of course, this would impose more pressures upon banks with their effort to improve their management.

Monetary policy alone cannot curb the assets bubble effectively. So I deem that the government will also resort to its financial policy and other related measures to help maintain economic stability.

By People's Daily Online