Although a "tight" monetary policy may result in more interest
rates increases, the interest spread should be cut to encourage
banks to innovate, a senior lawmaker and scholar said
yesterday.
Cheng Siwei, vice chairman of the Standing Committee of the
National People's Congress, said yesterday the central bank should
increase the benchmark deposit rates more than the lending
rates.
It is important to ensure that residents avoid depreciation of
their savings to the level of negative deposits, Cheng said in a
speech at Fudan University yesterday, adding that he made the
comments as a scholar not as a lawmaker.
The squeezing of the interest spread, made worse by a faster
pace of deposits rate increase, may cut the profits of banks.
However, some good may come out of it if shrinking the interest
margins for the lenders also spur them to diversify into more
innovative businesses to boost profits, he said.
About 70 percent of Chinese banks' profits are generated from
the interest spread, Cheng, 72, said.
The one-year benchmark deposits rate is 3.87 percent after five
increases this year. But the rate still trails inflation, making
savings unattractive and instead pushed funds out of deposits to
stock market.
The benchmark Shanghai Composite Index has jumped 85 percent so
far this year. Cheng is "cautiously positive" on China's stock
market and said picking up good listed companies as investment
targets is more important than focusing on the index's
movement.
China will shift its monetary policy from "prudent" to "tight"
next year to prevent its economy from overheating and will also
move to curb inflation accelerating, the Central Economic Work
Conference said on Wednesday.
Daniel Melser, a Moody's Economy.com senior economist, said the
change in language used to outline the monetary policy reflects
real worries in China about inflation, exuberant economic growth
and investment, as well as stock market and real estate
bubbles.
"This will almost certainly see further interest rate rises and
hikes in banks' reserve requirements," Melser said.
China's consumer price index, the main gauge of inflation, rose
to 6.5 percent in October, a record high in more than a decade.
(Shanghai Daily December 7, 2007)
