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Meetings held on China's interest rate and economic stabilization
The Epoch Times

Since August, China's macroeconomic policy makers have faced a dilemma: Either fail in cooling down the economy or risk causing economic depression. Premier Wen Jiabao noted in August the continued expansion of fixed asset investment and the rise of the price of raw resources. The supply of coal, electricity and oil is still short. Besides those, systemic problems the Chinese economy faces, such as the ailing banking system, have not been resolved.

Meanwhile, the U.S. Federal Reserve has raised interest rates twice in the past year. Under these circumstances, it calls for raising the interest rate of the yuan to start again.

China Business is one of the most widely read financial newspapers in China. The newspaper invited Ba Shusong, the vice director of Research Institute of Finance of the Development Research Center of the State Council; Zhang Zhuoyuan, a researcher of Institute of Economics of Chinese Academy of Social Sciences; Zhang Yongjun, a member of the Department of Economic Forecast in State Information Center; and Zhang Yin, the chief analyst of Hujie Investment Consultation Limited Co., to have a discussion about raising the interest rate.

The Difficulty of Maintaining Macrostabilization Policies Through Administrative Means

China Business reports that the price of steel products and real estate dropped in June and July, but they had risen more recently. Fixed asset investment has had a similar rebound. Does it mean the effects of the macrostabilization policies are not effective? Ba Shusong said this proved that the solutions based on administrative adjustments, such as raising reserve requirements and forbidding new loans, would have a good effect initially, but continuing to use administrative means to cool down the economy could prolong the time needed for macrostabilization policies. Thus, if the government only depends on the administrative means to restrict credit, instead of allowing interest rates to adjust through the free market, it will be difficult to stabilize the economy. As a result, the effect will not last long.

Reasons Why the People's Bank Should Raise the Rate

Ba pointed out several reasons why the government should raise the interest rate. First, he noted the rapid rise of real estate investment. When the interest rate is negative, as it is at present, authorities have a hard time restraining investment. Once the administrative grip on credit loosens, investment in real estate will take off again, which will push up the price of steel products, along with the prices of other resources.

Next, a substantial drop in savings has occurred since the onset of the macrostabilisation policies. People are predicting higher inflation, which, combined with already negative interest rates, isn't good news for savers.

Third, judging from the already high price level of many resources and food, and the direction these prices are going — the CPI in July went up by 5.3 percent — will hurt an already strained populace. The potential for high inflation is greater than official figures suggest, while the negative interest rate is higher than the official figures admit.

Finally, the Federal Reserve’s recent raising of the interest rate has narrowed the gap between the nominal interest rates in the United States and China. This puts pressure on Chinese interest rates to follow in order to stem cash outflows.

Watch Out for Consumer Prices in September

Zhang Yongjun believed that it was inevitable that the interest rate of the yuan would rise. It is only a matter of timing. After analyzing the current situation, he thought September would be telling. First, we should see whether the CPI will fall, and whether the fall will continue. At the same time, we have to watch whether the overall economy in China will slow down. Second, because China had a severe shortage of coal and electricity in July and August, many industries have reduced their output. In September, after the peak of electricity shortage, the effects of current macrostabilisation policies, or the lack thereof, will be clear.

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