OPINION> Commentary
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OPINION> Commentary
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Prudence over rate cut
(China Daily)
Updated: 2009-02-16 07:34 In the global fight against economic recession, developed countries' zero-interest-rate policy does not necessarily make a good option for China. Chinese policymakers should remain sober-minded even in the face of loudening calls for further interest rate cuts to boost domestic growth. By stressing that China's interest rates are not as high as some observers claim, Yi Gang, vice-governor of the People's Bank of China, made clear on Saturday that there isn't much room left for interest rate cuts. Such a statement is much needed to dispel the misconception that China's central bank should follow the lead of its Western counterparts who are racing to slash interest rates to save their economies. When statistics showed that China's consumer prices grew only 1 percent in January, the slowest pace in 30 months, while producer prices accelerated their fall by 1.1 percent in December to 3.3 percent last month, some urged interest rate cuts to reflate the economy.
Rapidly slowing inflation is a justified cause for concern. Given the gloomy global growth outlook, Chinese policymakers need to focus on preventing the national economy from cooling faster than expected. The potential deflation that can make the case significantly worse certainly demands close attention from the authorities. However, the need for a relatively loose monetary condition does not mean that China should adopt a zero-interest-rate policy as some developed countries did. For one thing, the zero-interest-rate policy has not proved effective in combating economic recession in those countries. Years of zero interest rates have yet to decisively bring the Japanese economy out of its lost decade. But the negative impact of enormous carry trade associated with this policy becomes more and more obvious for both Japan and the world economy nowadays. As to the effect of the US Fed's decision to cut interest rates to virtually zero, it is an open question as to when the US economy will show signs of recovery from its deepest crisis in at least 70 years. Even without these examples, extremely low interest rates obviously do not comply with the fundamentals of the Chinese economy. For instance, the country's high saving rate means an excessive interest rate cut will hurt savers more than it helps debtors. Though spending is desirable at the moment to help revive the economy, it makes no sense to punish savers with a biased interest rate policy. China's rising productivity and handsome average return on capital also do not support a zero interest rate. And a spurt of credit extension in January shows that the country's central bank is not short of policy tools to ensure liquidity supply. Under such circumstances, caution over an interest rate cut is needed to preserve monetary ammunition for uncertainties ahead. (China Daily 02/16/2009 page4) |
