Can lowering interest rates to 0 stimulate the Chinese economy?
Delight in the intriguing dynamics of China's pursuit of short-term economic stimulation and explore the potential long-term consequences that may impact both China and the US.
After the announcement of lowering deposit rates by several major banks last Thursday, including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank of China, many other nationwide joint-stock banks, such as China Merchants Bank, Shanghai Pudong Development Bank, Everbright Bank, CITIC Bank, and China Minsheng Bank, have also announced reductions in certain RMB deposit rates. The magnitude of the rate cuts ranges from 5 to 15 basis points, with 1 basis point equivalent to 0.01%.
This is the second round of deposit rate cuts by these banks since the adjustment made in September last year. Such actions have once again sparked intense discussions in the market.
Now, let's delve into two interesting viewpoints regarding whether interest rate cuts are effective:
One interesting viewpoint comes from Professor Zhang Bin and other researchers at the Chinese Academy of Social Sciences (CASS), who propose implementing zero interest rates as an extreme policy measure. Their perspective aims to maximize China's macroeconomic monetary policy, suggesting that lowering the current policy interest rate to 0 could save approximately 7.1 trillion RMB in interest payments for the entire society.
According to their proposal, they believe that this approach would specifically target the issue of insufficient overall domestic demand and have a tremendous impact. It would send a clear and strong signal to the entire society to expand domestic demand. Consequently, it would lead to a decrease in financing costs across society, trigger a chain reaction, and result in increased asset valuation. Ultimately, every economic entity in China would benefit from these positive effects.
However, Professor Xu Gao, Chief Analyst at China International Capital Corporation (CICC), disagrees with this viewpoint.
In Professor Xu Gao's perspective, the current interest rate cuts are a reluctant choice driven by the prevailing circumstances. Even if the central bank lowers the seven-day reverse repo rate to 0, it may not necessarily stimulate financing injections into the real economy. Monetary policy cannot be implemented strictly according to textbooks, and Keynesianism has been proven to have limited effectiveness in recent years.
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