China should lower interest rates and boost infrastructure investment to ensure the economy would grow by at least 5 percent next year, an influential Chinese think tank said.
Authorities need to boost domestic demand, including consumption and investment, to counter the property slump and any slowdown in exports, Zhang Bin (張斌) and Zhu He (朱鶴), research fellows at China Finance 40 Forum (CF40), wrote in an article on Monday.
CF40 is a Beijing-based think tank whose members include People’s Bank of China (PBOC) Deputy Governor Chen Yulu (陳雨露) and Sun Guofeng (孫國峰), the head of the bank’s monetary policy department.
Policymakers should use interest rate policy tools earlier rather than later and alleviate the private sector’s debt burdens with lower rates, Zhang and Zhu wrote.
Lower rates can also enhance asset valuations in the private sector, and expand investment and consumption levels, they wrote.
CHALLENGE
A target of 5 percent economic growth next year is not high considering the negative impact of COVID-19 controls on economic activities, they wrote.
However, even achieving 5 percent 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 (US$33 trillion), and cutting interest rates can significantly lower debt burdens, the authors said.
The leverage ratio, which is total debt compared to GDP, should not be a constraint on macroeconomic policies as there is still a lot of space to use fiscal and monetary policies, they said.
The PBOC could cut policy interest rates as soon as today, when the bank is likely to roll over at least 950 billion yuan in maturing one-year loans.
A reduction in the reserve requirement ratio for banks earlier this month sparked speculation the bank would start cutting interest rates as well.
The PBOC also recently reduced the interest rate for the relending program to rural and small businesses.
Separately, Yu Yongding (余永定), a prominent economist at the Chinese Academy of Social Sciences and former adviser to the PBOC, called for a cut in the benchmark lending rate, which has not changed since it was last lowered in 2015.
Yu added that the PBOC should and is likely to reduce banks’ reserve requirement ratio further to arrest the economic slowdown.
BOND ISSUANCE
China should also issue more government bonds next year so that fiscal policy can play a bigger role in driving growth, Yu wrote in an article on Monday, adding that lower rates could make it easier to sell bonds.
He criticized China’s stimulus approach after the 2008 global financial crisis, when local governments were encouraged to set up financing platforms to raise money.
It would have avoided many troubles if the central and local governments had issued bonds to fund the stimulus package instead, he said.
Some economists are forecasting that China would start adding fiscal stimulus early next year after the country’s top officials said their key goals for the coming year include counteracting growth pressures and stabilizing 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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