Again, China has surprised the world by its radical monetary policy. From November 27, the one-year benchmark interest rate will be reduced by 108 basis points. From December 5, the RMB deposit reserve ratio for large financial institutions such as the Industrial and Commercial Bank, the Bank of China, and others will be reduced by 1 percentage point and the RMB deposit reserve ratio for small and medium-sized financial institutions will be reduced by 2 percentage points.
On the eve of the annual central economic work conference, the 108 basis point cut seen in a decade by the central bank reflects deep government worries over next year’s economy, as well as a determination to deal with it. Three aspects should be grasped: supporting policy to stimulate the economy; dealing with deflation ahead of time; and easing the deterioration of global economy, especially the United States economic situation.
Since the stimulus plan was introduced, on November 5, there has been a lack of supporting monetary measures. Local governments’ intension of investment has reached a staggering 18 trillion yuan, but this requires the co-ordination of monetary policy. Stimulating the economy has become a political decision as well as an overriding task, so there is no problem as to whether banks will be willing to lend the money, and the money supplied will be injected into the real economy under political pressure.
A substantial interest rate cut would reduce corporate financing and liability costs, in particular for SMEs and state-owned enterprises(SOE).
Next, large-scale central and local government expenditure to social programs, and investment from central government agencies, local governments and SOEs, will require the issue of government and corporate bonds, to keep low the interest rates and the cost of debt.
An interest rate cut may boost consumer spending, especially in the sluggish real estate market. A substantial rate cut will also have a positive impact on some consumer lending, such as cars loans.
Cutting interest rates will relieve appreciation pressure on the RMB exchange rate, vital right now to China’s exporters. The U.S. Fed’s benchmark interest rate has dropped to 1 percent, and is expected to drop again in December, putting pressure on RMB to rise in value. The government has raised the export tax rebate and cut or abolished some export tariffs to help companies to ease the difficulties. However, in a contracting global market, to expand or even maintain export growth in this manner will arouse an international backlash. China needs a moderate RMB depreciation. An interest rate cut is a good way to promote RMB devaluation or hedge the pressure of RMB against USD.
It is conceded widely that deflation is in next year’s cards. In China or in the United States, if deflation cannot be controlled, fiscal and monetary policies will have failed. The “lost decade” of Japan in the 1990s is a terrifying memory for all, so economic policy makers are ready to take radical measures to prevent economies from hard landings.
Finally, the deterioration of the global economy, especially the American economy, is beyond the experience of Chinese decision-makers. Citigroup and General Motor, which are once the symbols of glorious capital society with American style, are on the verge of bankruptcy, which need large-scale government aid, and greatly hurt the confidence in the market. Getting through a cycle, especially one so devastating, will add immeasurably, though painfully, to the institutional knowledge of Chinese economists, government officials and business leaders.
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PBoC Cuts to the Deep and Quick
Zhou Jiangong, Shanghai
27 November 2008
Again, China has surprised the world by its radical monetary policy. From November 27, the one-year benchmark interest rate will be reduced by 108 basis points. From December 5, the RMB deposit reserve ratio for large financial institutions such as the Industrial and Commercial Bank, the Bank of China, and others will be reduced by 1 percentage point and the RMB deposit reserve ratio for small and medium-sized financial institutions will be reduced by 2 percentage points.
On the eve of the annual central economic work conference, the 108 basis point cut seen in a decade by the central bank reflects deep government worries over next year’s economy, as well as a determination to deal with it. Three aspects should be grasped: supporting policy to stimulate the economy; dealing with deflation ahead of time; and easing the deterioration of global economy, especially the United States economic situation.
Since the stimulus plan was introduced, on November 5, there has been a lack of supporting monetary measures. Local governments’ intension of investment has reached a staggering 18 trillion yuan, but this requires the co-ordination of monetary policy. Stimulating the economy has become a political decision as well as an overriding task, so there is no problem as to whether banks will be willing to lend the money, and the money supplied will be injected into the real economy under political pressure.
A substantial interest rate cut would reduce corporate financing and liability costs, in particular for SMEs and state-owned enterprises(SOE).
Next, large-scale central and local government expenditure to social programs, and investment from central government agencies, local governments and SOEs, will require the issue of government and corporate bonds, to keep low the interest rates and the cost of debt.
An interest rate cut may boost consumer spending, especially in the sluggish real estate market. A substantial rate cut will also have a positive impact on some consumer lending, such as cars loans.
Cutting interest rates will relieve appreciation pressure on the RMB exchange rate, vital right now to China’s exporters. The U.S. Fed’s benchmark interest rate has dropped to 1 percent, and is expected to drop again in December, putting pressure on RMB to rise in value. The government has raised the export tax rebate and cut or abolished some export tariffs to help companies to ease the difficulties. However, in a contracting global market, to expand or even maintain export growth in this manner will arouse an international backlash. China needs a moderate RMB depreciation. An interest rate cut is a good way to promote RMB devaluation or hedge the pressure of RMB against USD.
It is conceded widely that deflation is in next year’s cards. In China or in the United States, if deflation cannot be controlled, fiscal and monetary policies will have failed. The “lost decade” of Japan in the 1990s is a terrifying memory for all, so economic policy makers are ready to take radical measures to prevent economies from hard landings.
Finally, the deterioration of the global economy, especially the American economy, is beyond the experience of Chinese decision-makers. Citigroup and General Motor, which are once the symbols of glorious capital society with American style, are on the verge of bankruptcy, which need large-scale government aid, and greatly hurt the confidence in the market. Getting through a cycle, especially one so devastating, will add immeasurably, though painfully, to the institutional knowledge of Chinese economists, government officials and business leaders.
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