Spending spur too little for economic woes

PUBLISHED : Friday, 11 June, 1999, 12:00am
UPDATED : Friday, 11 June, 1999, 12:00am

Economists are sceptical Beijing's latest cut in interest rates will spur consumption and a flagging economy given the country's depositors' structure and the condition of state-owned enterprises.

'The cuts are obviously to encourage people to spend more and save less. However, I do not think it will happen because unofficial figures show that about 50 per cent of savings comes from savers in the high-income group who have already bought what they need to buy,' said Zhang Yunling, director of China Academy of Social Sciences.

The other 50 per cent comes from savers in the low-to-middle income group.

'People in this category save as a security for the future.

'No matter how low the interest, they will still save to protect against the uncertain future such as job insecurity, education and medical bills.

'The capital markets are not developed and the risks of investment are too high for individual investors.

'So while there could be a small portion of money flowing into the markets from the high savers, it will not be from people in the low-middle income group.' Beijing on Wednesday cut deposit rates by an average one percentage point and lending rates by 0.75 of a percentage point.

This is the first interest rate cut this year and the seventh since May 1996.

The cut is bigger in deposit rates than lending rates, suggesting the government hopes to bring the spread of the banks to more acceptable levels.

Economists said the cut might not boost state-sector investment.

'For state enterprises, the cut could encourage them to borrow to upgrade operations, rather than expand.

'There is over-capacity in nearly all industries, so why would they want to invest more?' 'The biggest problem facing state-owned enterprises now is over-capacity,' Credit Suisse First Boston senior regional economist Tao Dong said.

'The rate cuts are surprising substantial, bringing nominal rates to extremely low levels. This could encourage some people to channel money to stocks, but it will take a while for existing bank savings to move into the markets,' Shanghai Finance Securities analyst Yao Xinmin said.