Image: Reuters

Chinese Central Bank

Inflation expectations among urban Chinese eased slightly during the second quarter, although a majority consider the current inflation rate unacceptably high, according to a central bank survey of 20,000 residents published on Thursday.

The People's Bank of China still faces a tough battle to rein in inflation expectations at a time when the real bank interest rate is deep in negative territory and there is still too much money sloshing around the economy, analysts say.

Among residents surveyed, 45.4 percent expect the third-quarter inflation rate at 1.7 percentage points less than the second quarter, the People's Bank of China said.

"Residents' expectations over future price increases has eased a touch," the central bank concluded.

But only 30 percent of respondents believed current prices were "acceptable," with 68.2 percent saying they were "too high."

China's headline consumer price index hit a 34-month-high of 5.5 percent in May, and many analysts expect inflation to peak in June or July before easing.

China is likely to increase bank deposit rates twice more this year while raising lending rates just once before pausing in its present policy tightening cycle aimed at taming inflation, the Reuters poll showed.

In addition, the central bank is likely to raise bank reserve ratios further after it lifted the ratios on Tuesday for the ninth time since October.

"This shows that the policy tightening has showed some results," said Wang Hu, an economist at Guotai Junan Securities in Shanghai.

"Inflation expectations and inflation are intertwined -- when expectations high, people tend to buy more and thereby push up prices," he said.

Another survey of 3,000 Chinese bankers by the central bank found that 68.2 percent expected higher interest rates in the third quarter, with only 0.2 percent foreseeing a rate cut.

Fewer bankers said the economy was "slightly overheating" and more said the economic situation was "normal" compared to the previous quarter, according to the survey.

NEGATIVE REAL RATE

With one-year bank deposit rate at 3.25 percent and inflation running above 5 percent, Chinese savers are effectively losing money by keeping their cash in banks. This encourages them to shift funds into riskier investments such as property.

The survey showed that only 42 percent of respondents said they would prefer putting their money in banks while 41 percent preferred investing in bonds, stocks and funds.

Xia Bin, an academic adviser to the central bank, called for more steps to correction the negative real interest rate.

"The situation of negative real deposit rate must be changed, otherwise it will create difficulties for controlling prices and stabilising expectations," the official China Securities Journal on Thursday quoted Xia as saying.

China will not loosen policy any time soon but instead tightening monetary conditions via open market operations and rises in bank reserve requirements, Xia said. His view was broadly in line with the latest poll on China's monetary policy

In the central bank survey, over a third of the respondents expected Chinese housing prices to stay stable in the second half, while 25.9 percent said housing prices would continue to increase.

In a separate survey of 5,000 company managers, the central bank said the business confidence index eased 0.5 percentage points to 75.8 percent in the second quarter from the first quarter, while the business climate index also fell 0.5 percentage points to 70.6 percent. (Reporting by Zhou Xin and Kevin Yao; Editing by Chris Lewis, Jonathan Hopfner and Ramya Venugopal)