A recent report by the China Finance 40 Forum (CF40) has called on policymakers to accelerate interest rate cuts and increase government spending to stimulate demand in the Chinese economy.
Despite China's recent efforts to support economic growth through measures like interest rate reductions, analysts worry about the potential impact on bank profitability. The CF40 report emphasizes that cutting policy rates is essential to counter insufficient demand, even as the central bank navigates the risks to financial institutions.
Over the past year, China has reduced the five-year Loan Prime Rate (LPR), a key benchmark for mortgage rates, by a cumulative 60 basis points across three cuts. Recent policies also included a 20-basis-point reduction in the policy rate and a 50-basis-point cut 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 suggests that to effectively stimulate demand, government spending should exceed the combined growth target for GDP and inflation. Zhang explained that if China targets a 5 percent GDP growth rate and a 2 percent inflation rate next year, broad-based government spending should grow at more than 7 percent. In the pre-pandemic years, China's broad-based fiscal expenditures grew by over 10 percent.
Guo Kai, another senior fellow at CF40, echoed these views, highlighting the need for a nominal GDP target to navigate the challenges of a low-interest-rate environment. If real GDP growth slows, policymakers could implement expansionary fiscal or monetary policies to boost inflation and sustain economic momentum.
Analysts remain optimistic about China's recent comprehensive policy package, believing that effective implementation will be crucial for maximizing benefits and laying the foundation for sustainable economic growth.
Reference(s):
cgtn.com
