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China should cut interest rates - govt researcher
August 19, 2014 / 7:14 AM / in 3 years

China should cut interest rates - govt researcher

People cross a bridge at Pudong financial district in Shanghai August 11, 2014. REUTERS/Carlos Barria

BEIJING (Reuters) - China ought to loosen monetary policy further through “modest” cuts in bank lending rates and reserve requirements by next year to spur economic growth, a researcher at a government think-tank said.

Chen Dongqi, deputy chief at the Academy of Macroeconomics Research - which is affiliated to China’s top economic planner, the National Development and Reform Commission - said the Chinese economy is losing momentum as domestic demand softens.

Although China is on track to meet this year’s economic growth target of 7.5 percent, Chen said surprisingly weak loans in July, when the amount of money flowing into the economy hit a six-year low, were not to be shrugged off.

“We should pay great attention to the sharp falls in the credit and financing figures for July. The shrinking amount of cash flowing into the economy will harm economic growth,” Chen told Reuters in an interview.

“The window has been opened for cutting interest rates and the reserve requirement ratio (RRR),” he added.

Chen is not alone in calling for looser policy, but he belongs to a minority that believes rate cuts are warranted.

He declined to estimate how deep he thinks the cuts in interest rates and RRR levels should be, saying only that policy should be loosened incrementally to avoid having too much cash flow into the economy in one go.

“To avoid pumping too much money into the economy too quickly, we should walk slowly in small steps, which means increasing the frequency of modest interest rate and RRR cuts,” he said.

Such an approach would lead the public to think that monetary policy has changed from being relatively tight to becoming moderately loose, thereby encouraging firms and households to spend, Chen said.

A SOFT LANDING FOR PROPERTY

The economist’s call for rate cuts came after China’s economy showed signs of softening in July, when growth in investment, retail sales and bank lending were unexpectedly tepid.

To re-invigorate the economy, China has relaxed monetary policy since April by lowering the RRR for small banks to boost lending, easing controls in the property market, and accelerating the construction of some infrastructure works.

A Reuters poll in July showed analysts were divided over whether China would cut the RRR in coming months.

Half of the economists surveyed thought the RRR would be reduced by 50 basis points to 19.5 percent between October and March, and a vast majority thought interest rates would remain unchanged.

Unlike some analysts, Chen was sanguine about the broader risks from China’s cooling property market, where prices fell for a third consecutive month in July.

Strong housing demand should ensure that the downturn stays shallow, creating a “soft landing” for the sector, he said.

“There is no big problem in the property market. It just takes time for the industry to get back to normal,” Chen said.

After a strong 2013, China’s housing sector has cooled this year as prices and sales turned south, leading many analysts to warn that it poses the biggest risk to broader growth.

Additional reporting by Shen Yan; Editing by Richard Borsuk

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