A new report released by the think tank China Finance 40 Forum (CF40) on Monday has called on policymakers to accelerate interest rate cuts and ramp up government spending to invigorate demand in China’s economy.
In recent months, China has introduced a series of measures, including interest rate reductions, aimed at stimulating economic growth. These initiatives, however, have sparked concerns regarding their potential impact on the profitability of banks.
Analysts contributing to the CF40 report argue that cutting policy rates is essential to combat insufficient demand. While the central bank is cautious about the risks to bank profitability, the report suggests that the consequences of inaction could be more severe. Prolonged weak demand might lead to a rise in non-performing loans and exert additional pressure on bank margins.
This year, the five-year Loan Prime Rate (LPR), a critical benchmark for mortgage rates, has been reduced by a total of 60 basis points across three separate cuts. Recent policy actions have also included a 20-basis-point decrease in the policy rate and a 50-basis-point reduction in the reserve requirement ratio for financial institutions.
“It is true that some financial institutions may face bankruptcy pressures,” said Zhang Bin, a senior fellow at CF40. “However, this does not justify a reluctance to cut interest rates. The central bank can take necessary measures to address troubled financial institutions.”
The report recommends that to effectively stimulate demand, government spending should surpass the combined growth targets for Gross Domestic Product (GDP) and inflation. Zhang elaborated that if China aims for a 5% GDP growth rate and a 2% inflation rate next year, overall government spending should grow by more than 7%. Prior to the pandemic, China’s broad-based fiscal expenditures were growing at rates exceeding 10%, he added.
Guo Kai, another senior fellow at CF40, echoed Zhang’s sentiments, emphasizing the importance of setting a nominal GDP target to navigate the challenges of a low-interest-rate environment. He suggested that if real GDP growth slows, policymakers could implement expansionary fiscal or monetary policies to boost inflation, thereby sustaining economic momentum.
Analysts remain optimistic about the recent comprehensive policy package. They believe that effective implementation of these measures is crucial for maximizing their impact and laying a solid foundation for future sustainable economic growth.
Reference(s):
cgtn.com
