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MNI Interview: Rate Cuts The Best China Growth Path-Advisor

MNI (Singapore)

Interest rate cuts are needed to combat weak domestic demand in China that would remain soft into next year, by spurring consumption and job growth more effectively than fiscal spending tied down by heavy local government debt loads, a senior policy advisor told MNI in an interview.

Sluggish services and tepid investment in property and infrastructure come against a backdrop of low near-term domestic inflation, Zhang Bin, deputy director of the Institute of World Economics and Politics at the state-affiliated think-tank the Chinese Academy of Social Sciences, said.

"I am more worried about next year when the downturn trend sustains as exports fail to rise strong enough to fill the gap caused by soft consumption and investment," said Zhang, noting the country should endeavor for the economy to expand about 5.5% in 2022.


China's economy is expected to slowdown from an estimated 8% expansion seen for 2021, and against an average of 5.5% for 2020 and 2021 combined.

Zhang suggested that a wise choice to boost the growth outlook is encouraging the private sector to re-leverage and increase spending with ample liquidity and loans at lower interest rates, adding that the old growth reliance on government debt expansion has limited space.

"Monetary policy should take the leading role in boosting the general demand, which is positive policy change," he said, referring to the latest cash reserve ratio requirement cut a "rehearsal".

In addition, rate cuts ease local government repayment pressures, he noted.

Some anticipation that the PBOC would move quicker on policy easing was dimmed on Tuesday after the central bank left the Loan Prime Rate, its benchmark rate for loans, unchanged for the 15th straight month.


Zhang suggested the PBOC should cut policy rates, particularly the benchmark loan rate, promptly in the coming months, pre-empting any possible tightening by the U.S. Federal Reserve.

"The expectation for Fed rate hikes will get stronger next year in the markets, then easing measures of the PBOC would be restricted and China could be forced to turn to fiscal policy at that time," said Zhang.

Zhang also said the global economic recovery could remain unbalanced on new Covid-19 infection surges from variants. As well, he said higher producer prices for factories are down to volatile global commodity input prices, and not robust demand.

That uncertainty also calls into question reliance on an export-led recovery for China and how fast emerging markets can recover from the pandemic, Zhang said.


Zhang said that based on GDP deflator calculations, that real interest rates had shown an upward trend in the past decade, which was lack of fundamental support since the economy is on track to slow down.

According to his labor market research, lower interest rates lead to increased work hours at a significant pace of nearly three hours in average per day in the low-end labor force under a 1 percentage point benchmark rate cut.

Employment is still weak in China, Zhang said, as wages for migrant workers rose only 2.3% on average in the past two years, compared with about 6% annual growth in the years before the pandemic. "Employment should still be policy focus," he said.


He conceded that the notion of "flooding the market with excess liquidity" may hold the PBOC back from rate cuts, but said inflation is not a concern now.

Core CPI that excluded food and energy prices, has remained below 1% since last June, Zhang said, adding that deflation is more of a worry.


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