Beijing adopts desperate measures to get its citizens spending again

Thrift on a national level is often regarded as a virtue. High savings levels can underpin a country's long-term economic growth, or put another way, a country which saves more can invest more and grow faster.

Yet, too much of a good thing can turn a virtue into a vice. The mainland is a case in point. It is being plagued by deflation as individuals salt away money in banks, which are experiencing serious trouble lending to credit-worthy borrowers.

One of the results is that state-owned banks, already straining under the weight of massive bad loans, still face heavy interest payments despite seven failed government attempts since May 1996 to convert savings into spending by interest rate cuts.

The benchmark interest rate on one-year personal deposits has fallen to a post-1949 low of 2.25 per cent, from 9.16 in May 1996. Yet, mainlanders are still reluctant to spend.

On Monday, in a move which smacked of desperation, Beijing tried a new tack by passing a controversial proposal to tax savers a flat rate of 20 per cent on their interest income. The decision has two objectives; to get savers to spend and to tax the rich and assist the poor.

Will this finally force some savings - which have risen by more than 50 per cent to 5.92 trillion yuan (about HK$5.52 trillion) from end-1996 - out of the banks and lift the retail price index, which has fallen for 22 months? Analysts said the impact on spending would be limited and more psychological than substantial, although the move would go some way in helping the poor and the laid-off workers.