Substantial reduction in policy rates may not solve China's current economic issues: expert

(ECNS) -- Recently, some online articles claiming China's central bank’s hesitation to cut interest rates lead to high real interest rates have been opposed by an expert.

The articles recommend that the "central bank should lower the nominal interest rate by at least 70 basis points."

However, Zhou Qiong, a senior researcher at the Shanghai Finance and Development Laboratory, believes that a proactive substantial reduction in policy rates may not be a solution to China's current economic issues.

 

The reasons for suggesting a rate cut include stimulating investment and consumption, reducing the interest burden on debtors, and boosting the stock market.

However, Zhou pointed out that the positive effects of such a rate cut would be limited and that the negative consequences must also be considered.

In the investment sector, China's real estate market is still undergoing adjustments, with an oversupply that needs to be consumed, Zhou said. It is crucial to ensure the completion and delivery of already sold properties.

While infrastructure investment can quickly drive GDP growth, it also leads to increased debt. Local governments and urban investment companies, responsible for much of the urban infrastructure construction, are already facing significant debt pressures that need to be addressed, she added.

"There are certainly areas with insufficient supply, such as healthcare and safe food, but these issues cannot be resolved by lowering interest rates," Zhou said.

From the perspective of consumption, Zhou noted that the potential for Chinese residents to leverage further is limited. Despite the high savings rate in China, social security is still below the levels of developed countries, necessitating more precautionary savings by residents.

Zhou also stated, "If the Chinese economy fails to improve, the central bank will continue to lower interest rates based on economic and financial market conditions. However, given the currently low nominal interest rate, the room for further cuts is quite limited. If there are signs of economic improvement, interest rates may rebound."