Government agencies continue to urge spending and investment stimulus despite rejection of PBOC proposal
Mark O'Neill and Peggy Sito
Government agencies have again called for interest rate cuts to reverse price stagflation and to encourage consumers to spend more, but economists believe cuts would do little to stimulate the economy.
The renewed debate follows the reported rejection by mainland leaders of a rate-cut proposal. Hong Kong media yesterday reported that Premier Zhu Rongji had turned down rate-cut options proposed by the People's Bank of China (PBOC), in order to avoid the risk of shaking the country's financial system.
However, the economic forecasting centre of the National Information Centre (NIC) strongly supported the rate-cut plan, saying it would encourage stock investors and consumers.
In a report published in official newspapers yesterday, NIC said interest rate cuts were needed
urgently in the economic conditions.
'Consumer prices are falling again and deflation is likely to recur,' it said. 'We advise the central bank to cut rates on loans and deposits by 0.5 percentage points.'
The NIC report said the slowdown in world demand had been accelerated by the terrorist attacks in the United States, and export growth next year would fall, meaning the main engine of growth would be domestic demand.
'The priority next year will be to find ways to expand this demand, including tax and fiscal policies. An interest rate cut would be the most effective. It would cut costs for companies and turn some of the about 7.1 trillion yuan HK$6.7 trillion) in bank savings into investment and spending,' it said.
However, the Chinese Academy of Social Sciences, a central government think-tank, opposed the rate-cut proposal.
'The interest rate is already at a low level. Any further reduction will not bring any significant boost to the economy and domestic consumption,' said Yuan Gangming, director of macroeconomic research at the academy.
Savings attitudes would not be changed significantly, even if the rate were cut by another 0.5 per cent or 0.75 per cent, he said.
The PBOC has cut interest rates seven times, from a high of 10.98 per cent on one-year, yuan fixed deposits, to 2.25 per cent, against 1.25 per cent for US dollar deposits over the same term.
Mr Yuan said that as China's capital market was not fully opened and the yuan was not fully convertible, the difference between the yuan and US deposit rates would not lead to major fluctuations in savings in the two currencies.
He said interest rates were not the crucial tool to give a further boost in domestic demand, but improving salaries and confidence in the country's social-welfare system were the keys.
He said the stock markets were not performing well because of a lack of investors, who had become cautious following the series of crackdown by the securities regulator.
'Any cut in interest rates will not give any help,' said Mr Yuan.
He cited the recent cut in stamp duties on the stock market as an example, saying the move had not brought back investors.
Mr Yuan said he did not believe the central bank and top leaders would cut interest rates.
The PBOC has shown no indication that it will cut rates. Officials at its branch in Wuhan last week angrily denied rumours of a cut, emanating from some insurance companies, that had swept the city.