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China Daily E-paper
Op-Ed Contributors
High interest rates can check investment spree
By Liu Yuhui (China Daily)
Updated: 2010-04-16 08:19
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The formation and inflation of any kind of property bubbles result from excessive issuing of currency and credit expansion. The expectations among enterprises and private investors for a low and even negative long-term interest rate will inevitably embolden them to invest in some long-term projects that are expected to bring them higher returns. Consequently, some irrational or ill-conceived investment moves are made.
The country should try to cement people's expectations for a substantial rise in its long-term interest rate. Specifically, the current deposit rate should be restored to the level prior to the global financial crisis or a higher one, such as 4-4.5 percent for the benchmark one-year deposit rate. Levying a property tax in the housing market essentially aims to enhance people's expectations for a long-term interest rate hike.
However, an opportunist approach embraced by some local regions discount any well-designed policies. The tax on "special housing consumption" adopted by Chongqing municipality and the tax on "housing reserves" adopted by decision makers in Shanghai are imposed in line with housing contract value, ruling out a possible tax on added property value.
Current housing prices are proving to be on the verge of super-bubbles and their collapse, just as securities investor Jin Yanshi said.
The author is an economist with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
(China Daily 04/16/2010 page8)
