China's biggest interest rate cut in nearly a decade was rare but necessary to help boost consumer and business confidence amid the global financial crisis, economists said yesterday.
"It reflects the authorities' determination to ensure sufficient liquidity to support growth," said Peng Ken, a Citigroup economist. "Recent plans on fiscal expansion could still take time to have an impact on growth, while the economy faces unprecedented external and internal pressures."
China announced it would reduce the benchmark one-year lending and deposit rate by 1.08 percentage points on Wednesday, the sharpest cut since October 1997 when the Asian financial crisis broke out.
The bank reserve requirement ratio was also cut by the largest amount since 1999 in a bid to boost lending.
The moves followed the central bank's three previous rate cuts of 0.27 percent at each step since September and the announcement of a 4 trillion yuan (US$586 billion) stimulus package on November 9 to boost domestic consumption.
"China has become a leader in the global relay of concerted efforts to combat the global financial crisis," said Sun Lijian, a finance professor at Fudan University.
"However, such moves are obligatory as China would face serious problems including higher unemployment rate, more bankruptcies, reduction of people's income and lower confidence if the government did not carry out supportive policies in a timely manner," Sun said.
With other countries also ready for interest rate cuts and heavy-weighted fiscal packages, China has won itself an active stance on the global stage of economics, which could maximize the influence of its rescue efforts, Sun added.
The United States said on Tuesday that it would commit up to US$800 billion in credit for home buyers, consumers and small businesses to save the country from the recession. The European Union also proposed measures totaling 200 billion euros (US$258.1 billion) on Wednesday. The United Kingdom and Malaysia have planned rate cuts and the Swiss have pruned rates for the second time in a month.
However, China should come up with more far sighted measures to stimulate long-term consumption after such a strong move, said Shen Minggao, an economist with Caijing Magazine. "The latest rate cut may help to increase people's short-term consumption, but it won't benefit the country's long-term demand. The government needs to carry out more measures to expand people's income and raise their confidence in the economy," Shen said.
Wang Qing, a Morgan Stanley economist, said China's move was ''more aggressive than we had expected" but predicted there would be at least another 108 basis points rate cut by the middle of next year. Citigroup's Peng Ken said the lending rate may fall to between 4 and 4.5 percent from the current 5.58 percent by June.
(Shanghai Daily November 28, 2008)
