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Comments on latest interest rate cut

By Xin Zhiming and Wang Bo  (China Daily)
Updated: 2008-11-26 20:48

China's central bank today announced it will cut benchmark interest rates by a surprising 1.08 percentage points, much more than its normal cuts. China Daily reaches several economists for their comments on the impact of the move.

Zhuang Jian: senior economist, Asian Development Bank, Beijing

The huge rate cuts show that the authorities are seriously concerned about the economic slowdown as most of the economic indicators are indicating worrisome prospects.

Although the country released a massive $586 billion stimulus package early this month, people's confidence remains weak as they are not sure to what extent the plan will work. The stock market's lackluster performance this week also reflects the uncertainty of investors.

After the adjustment in both interest rates and banks' reserve requirement ratio, investor and consumer confidence would improve and help stabilize the overall economy. If the national stimulus policies are implemented well, it will not be a problem for China to maintain an annual growth rate of 8 percent next year.

Dong Xian'an: macroeconomic analyst, China Southwest Securities

The cuts in the interest rates are well beyond market expectations. The cuts may lead to reduced interest payments for homebuyers of up to 300 billion yuan, while enterprises would benefit from reduced lending costs. The move is in the right direction, as it would help enterprises and consumer consumption.

The central government stance has become clearer than ever and the authorities may cut the rates again in December if the November economic indicators do not show much improvement.

 

Ma Ming

: economist, Beijing Institute of Technology

The surprisingly big cuts in interest rates are due to the exceptionally fast slowing of the economy. Economic growth in the fourth quarter could be very worrying. In the southern and eastern regions, the trend of capital exodus has become rather obvious as the economic growth slows.

The government must prevent financial institutions from incurring large amounts of bad loans as the property market confidence weakens. And certainly today's cuts would not be the last for the year.

 

Zhang Xiaojing: director, macroeconomic research department, Chinese Academy of Social Sciences

Such a considerable adjustment in interest rates indicates that policymakers have reached a common consensus that the Chinese economy is facing tough times. The several tiny revisions in interest rates earlier yielded limited results, because monetary policy is often not quite effective when the economy is in a downturn. We cannot count on monetary policy to maintain economic growth, but without it, the effect of fiscal policy cannot be maximized.

It is expected that the 108 basis point reduction will help stimulate investment and shore up the stock and real estate markets. There is still room for further interest rates cut next year, as inflation pressure is largely eased.

 

Li Jianwei: economist, State Council's Development Research Center

The scale of the rate cut, largely because of the previous expectations, is in line with current economic situation. The nation's industrial output grew only 8.2 percent in October, less than half of 17.6 percent growth in the first half. And the reading was still 11.4 percent in September.

This is a clear sign that economic growth will be weak in the fourth quarter with prospect for next year grimmer. The central government has already announced a series of massive stimulus package over the past month and it has earmarked an additional 1.18 trillion yuan for investment in 2009 and 2010. Now, it is necessary to further adjust monetary policy to spur the economy.

If all the measures are carried out effectively, the GDP growth could stay above 9 percent next year, rather than the World Bank's previous forecast of 7.5 percent. Such a massive interest rate cut could also help alter previous expectations of a further slowdown.