Chinese corporate and household debt interest payments as a share of GDP has doubled since 2002 to 12%
June 14, 2013 Leave a comment
June 12, 2013, 11:11 p.m. ET
The Next Move for Beijing
By TOM ORLIK
A prolonged slowdown in China’s growth sharpens the need for an innovative policy response. Fortunately for Beijing, it has more-creative options than another government spending spree.
The latest indications from the world’s second-largest economy are worrying. Industrial output and investment are decelerating. After stripping out the effect of over-invoicing, export growth is flat lining. It’s all enough to have Goldman Sachs strategist Jiming Ha wondering whether China is on the way to 6% annual growth, well below the first quarter’s 7.7%.China’s leaders have so far resisted the temptation to push the stimulus button—unless you count 9.1 trillion yuan ($1.5 trillion) in new lending in the first five months of the year. That may be the wiser course. Another investment splurge would support growth this year, only to defer the day of reckoning—and a correction down the line could be much more severe.
As Beijing searches for alternatives, interest-rate liberalization—allowing banks more freedom to pay savers above the benchmark deposit rate and lend below the benchmark loan rate—could be near the top of the list.
A move to raise the government mandated ceiling on deposit rates would have an immediate positive effect on income for household savers, catalyzing higher consumption. By raising returns it would also reduce saving required for retirement, meaning a higher share of income could be spent at the shops.
Abolishing the floor on the lending rate would also have benefits. It would reduce the cost to China’s businesses of servicing their massive debts, freeing up funds for more productive uses. Better, it would do so without sending the panic signal of an interest-rate cut.
The main losers would be the commercial banks, which count on the policy-protected spread between lending and deposit rates for the bulk of their profits. But banks have been able to maintain profit growth—albeit at slower rates—since Beijing made a similar move in June 2012. The banks’ likely response—maintaining margins by shifting lending to higher-risk private firms—could also channel credit to more productive parts of the economy.
No one has a crystal ball on Beijing’s policy choices. But the slowdown in growth and the challenge of reform both demand a response. A move to liberalize interest rates would tick both boxes.
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