China needs to cut rates to lift growth, Beijing think-tank says

BEIJING (BLOOMBERG) – China should lower interest rates and boost infrastructure investment to ensure the economy will grow by at least 5 per cent next year, according to an influential Chinese think-tank.

The authorities need to boost domestic demand, including consumption and investment, to counter the property slump and any slowdown in exports, research fellows at China Finance 40 Forum wrote in an article on Monday (Dec 14).

CF40 is a Beijing-based think tank whose members include People’s Bank of China (PBOC) deputy governor Chen Yulu and head of the bank’s monetary policy department Sun Guofeng.

Policymakers should use interest rate policy tools earlier rather than later and alleviate the private sector’s debt burdens with lower rates, CP40 wrote. Lower rates can also enhance asset valuations in the private sector and expand investment and consumption levels, according to the article.

A target of 5 per cent economic growth next year is not high considering the negative impact of virus controls on economic activities, the research fellows wrote.

However, even achieving 5 per cent would be a challenge if domestic demand does not improve, they said. The combined debt of Chinese companies and residents has climbed to 210 trillion yuan (S$45 trillion) and cutting interest rates can significantly lower debt burdens, the authors said.

The leverage ratio, which is total debt compared with gross domestic product, should not be a constraint on macroeconomic policies as there is still a lot of space to use fiscal and monetary policies, they said.

PBOC reduced the reserve requirement ratio for banks earlier this month, sparking speculation it would start cutting interest rates as well. The PBOC also recently reduced the interest rate for the re-lending programme to rural and small businesses.

Some economists are forecasting China will start adding fiscal stimulus in early next year after the country’s top officials said their key goals for the coming year include counteracting growth pressures and stabilising the economy.

In a move that should support fiscal spending early next year, Beijing has told local governments that they can begin selling “special” bonds earmarked for next year from Jan 1, 21st Century Business Herald reported on Monday.

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