Rate cut inadequate for mainland spending lift
The mainland's interest rate cut, the seventh since 1996 and the fourth since the start of last year, is a desperate move to kick-start the slowing economy, as a programme of spending has run out of steam.
The question is whether the cuts will succeed any better than the previous ones in persuading people to spend instead of save.
The fact the government is believed to be considering additional measures, such as selected wage increases and a possible tax on bank deposits above a certain level, indicates Beijing feels more needs to be done.
A commentary in the People's Bank of China's Financial News is not encouraging. It said the country faced a complicated and difficult external environment, with exports and inward investment likely to fall this year and fixed-asset investment and consumer spending slowing down.
It went on to explain that the cuts would encourage people to spend more, boost fixed-asset investment, lower production costs of exporters and stimulate capital markets, while the larger cut in rates on savings than on loans would help to arrest the declining profitability of commercial banks.
The cut came with news that industrial growth last month had slowed to 8.9 per cent year on year, its lowest monthly figure this year and a sign that a programme of government spending worth 200 billion yuan (about HK$186 billion), launched inJuly last year, has run out of steam.
Output last month of three key consumer products - colour TVs, washing machines and refrigerators - fell by between 0.8 per cent and 4.3 per cent year on year.
Output of freezers fell 21.5 per cent because of a saturated market and weak sales.
Production of electricity in the first five months rose by only 4.9 per cent on the same period a year earlier.
Urban consumers are not spending because they have bought all they need for their home.
A car and an apartment remain out of the reach of many people, and they are keeping back money to pay for items the state used to cover - medical care, education, unemployment and retirement.
Even after the latest cut, it is doubtful whether this pattern will be broken.
Actual interest rates, taking inflation into account, are sufficient to still attract firms and individuals towards depositing money with banks.
In April, retail price inflation was minus 3.5 per cent, which means the actual interest on a one-year deposit, after the cut, is 5.75 per cent. According to Liu Shucheng, head of the economic research institute at the China Academy of Social Sciences, the proportion of individual spending has fallen to its lowest level since 1949 and is very low by world standards.
For him, the key is to raise personal incomes.
In the past 20 years, farm incomes have risen by an annual average of 7.9 per cent, but since 1985 they have risen by about 4 per cent, except for 1996.
In the same 20-year period, urban incomes have risen an average annual 6.1 per cent, but only 4 per cent in the past four years.
To get over this problem, incomes could be raised for the lowest paid as well as laid off and retired workers.
These increases could also flow to civil servants while incentives could be offered to managers and employees of state companies by linking their income to the performance of their firms.
Another idea proposed in the media is a tax on individual bank deposits above a certain level.
By the end of April, such deposits exceeded five trillion yuan for the first time, rising by 180.8 billion yuan, a record increase for the four-month period.
The size of the rate cut took the markets by surprise and was a clear indication that the government is ready to act boldly to invigorate the economy.
However, more measures are likely to be needed if the jam is to be broken.