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More rate cuts needed to fortify economy

By Li Hong (chinadaily.com.cn)
Updated: 2008-09-24 16:06

As the Chinese economy is obviously downward spiral a deposit rate cut is immediately needed to inspire domestic spending and flush out a portion of the public's huge savings to the country's anemic equity markets.

An accompanying cut on the banks' loans will buoy corporate and individual investors to jack up their investment, and spur potential home-buyers to clinch a mortgage deal at a lower cost and an earlier time.

What a substantive rate reduction will sustain is the benchmark 10-percent GDP growth during the most economically difficult time world has seen for many decades. Some consider it is crucial for China to maintain its growth momentum as the United States and Japan, the world's two largest economies, are contracting.

Beside the rate reductions, some advocate that the Central Government in Beijing drafts an ad hoc stimulus plan, and others suggest the finance ministry give more tax holidays to mid- and small-size businesses to boost production and create jobs. At the same time why can't the individual income taxation levying threshold of 2,000 yuan be raised to 3,000 yuan or even more to leave more money in the average Joe's pockets for the benefit of consumption?

Signs have popped up that the world's biggest developing economy, with a GDP last year of US$2.68 trillion, is slowing down. Economists have warned that the downward trend of the economy ought to be halted now, because, if not, it is likely to weaken further in the coming months, as the ferocious financial hurricane swirling through Wall Street is expected to spill over, and hit here.

After five-long years of tightening monetary and fiscal policy to fight inflation, which was biting the ordinary folks, the People's Bank of China, the central bank, reversed course in mid September, trimming interest rates on borrowings and easing bank lending restrictions. The measure was taken after the top leadership decided at a key meeting in Beijing on July 25 that the major economic goals should shift to sustaining growth, though, at the same time, keeping inflation at bay.

Premier Wen Jiabao is to address the United Nations General Assembly and give more details on China's efforts to lay the foundation for solid Chinese growth this year and next. This will form part of the world's concerted endeavor to confront global slump, if not recession.

Analysts say the tiny 0.27-percent rate reduction on the one-year bank loans, decided by the central bank earlier, will not be enough to protect this sprawling and fledging economy from a global economic downturn.

After months of heating up, consumer prices cooled down sharply in August, declining a gasping 2.2 percent from July to end at 4.9 percent, as prices for food and industrial raw materials fell off their mid-summer highs. China's export shipments have slowed remarkably, too, particularly when adjusted for inflation and expressed in yuan.

The equities market also looks bleak. The housing prices are dropping for the third consecutive month, particularly in the coastal cities including Shenzhen, Guangzhou, Shanghai and Hangzhou. This doesn't bode well for China's banking system, as some homeowners are reported to have defaulted on their mortgage payments.

The stock market in Shanghai and Shenzhen has lost up to 70 percent of its value since October when the indexes peaked. Some 20 trillion yuan of market value was lost during the fall.

A slew of government measures to slash stock trading tax, and heightened share buybacks by listed companies in the past few days have done little to boost the domestic bourses. Meanwhile, RMB bills are thronging to the banks' saving accounts. Experts believe only a substantive rate cut is able to channel the funds back to investment.

Many market watchers believe China's one-year benchmark deposit rate of 4.14 percent, which is much higher than the 2 percent standard rate for the United States, will, together with the rising RMB, lure lucrative “hot money” from the world capital markets into the country.

To prevent an American-style sub-prime crisis from happening here, economists strongly suggest the central bank and the government's banking regulatory committee keep eyes wide open for any irregularities from lenders doling out mortgages, especially, the minimum 30 percent down payment, a safety line that must not be breached.

And, if the rate were to be cut, reenergizing China's economic engine and keeping both production and consumption sizzling up, the central bankers should, once again, probe for any upside risks to inflation.