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Experts: Tightening macro-economic policy may shift

By Xu Shenglan (chinadaily.com.cn)
Updated: 2008-10-10 11:18

The central bank announced cuts in both the interest rate and reserve-requirement ratio Wednesday night, and the State Council decided to cancel the 5 percent individual income tax on savings interest earnings from Thursday.

Experts said the country is likely to take further steps to cut interest rates in future, but policy making will be affected by the rescue plan for the US economy.

More lending capital of commercial banks will flow to the real economy led by the cut in reserve-requirement ratio, which will also alleviate some firms' problems like insufficient funds, difficulties in borrowing from banks, and the pressure of the fixed investment slowdown.

The loan interest rate cuts will lower firms' costs of using money and raise their net profits directly. It will be more positive than a credit expansion-move in boosting enterprises' profits and preventing the tightening of the domestic economy, said experts

The income tax cut, which is equivalent to a raise of 0.2 percent interest rate, will help alleviate the long-term negative interest rate, while the inflation rate stays at levels above the deposit rate, which is a strong incentive for consumers to spend rather than to save.

The cancellation of the 5 percent individual income tax on savings interest earnings offsets residents' losses brought forward by interest rate cuts, Li Huiyong, macro-economic analyst of Shenyin & Wanguo Securities, told China Securities Journal.

According to him, the loosening in monetary policy highlighted the government's rising concern over the slowing economy and slumping capital market. It is estimated that the interest rate and the reserve-requirement ratio will be further reduced by 80 basis points and 5 percentage points respectively.

The cuts in the interest rate and the ratio will have a limited impact on increasing bank credit under rigid credit quota management rules, which might be cancelled to stimulate lending, Li Huiyong added.

China is likely to take further steps to cut interest rates in the future under the economic slowdown, although there are uncertainties, said Guo Tianyong, Director of the Research Center of the Chinese Banking Industry, Central University of Finance and Economics, Beijing.

The implementation of the $900B bailout plan for the US economy will affect China's monetary policy making, he added. An increase in US treasury bonds will lead to the dollar's depreciation, which will push up the prices of international commodities. So China will face higher imported inflationary pressures, which will hamper the central bank's decision-making ability.