Zero rate not suitable

China should not resort to a zero interest rate policy to deal with the ongoing financial crisis, says an article in Yanzhao Metropolis News. The following is an excerpt:

To tackle the global financial tsunami and rescue their rocky economy some Western countries, such as the US, the European Union and Australia, frequently lower their rates. China has also turned to a loose monetary policy in an effort to keep its economic growth, making five interest rate cuts since Sept 16 last year. The benchmark one-year deposit interest rate declined to 2.25 percent from the previous 4.14 percent.

Remarks by the two top-ranking Chinese central bank officials hint China will not further cut its interest rates. Yi Gang, vice-governor of the People's Bank of China, said last weekend that there is not much room for a further rate decline in the near future and ruled out the possibility of a zero rate. Governor Zhou Xiaochuan also said that interest rate cuts are not the only available method to stimulate the economy.

But recently some experts have called for China to lower its interest rate once again to coordinate with a new round of cuts by other countries. Some suggested the country adopt a zero or quasi-zero rate like the US for the sake of consumer stimulation.

But Chinese peoples' traditional saving and thrift mean the nation should maintain a moderate rate level. The country's stock markets are in a prolonged slump and most Chinese still mainly depend on bank depositing to keep their incomes growing or at least not devaluing. A zero interest rate will cause direct losses to ordinary depositors instead of substantively spurring economic growth.

The outbreak of the US financial crisis is closely related with its long-held zero interest rate policy. The world's largest economy has adopted an excessively loose monetary policy to curb its economic slowdown since the dotcom bubble burst in 2001. The zero interest rate in the following years contributed much to the swelling bubbles in its property and capital markets.

China is a developing country with a large population. Adopting a zero rate policy will likely give rise to more serious financial problems.

(China Daily 02/23/2009 page2)