For the second time in three months, the Central Bank of China has reduced interest rates to 5.35%. As Burke Ugarte highlighted, these policy has been successful in inducing manufacturing growth, but fails to encourage consumer spending. The growth in investment in factories, infrastructure and other fixed assets is still running higher than 25% than growth in consumption.
A new Chinese policy plans was designed in order to address the problem of insufficient consumer spending. Such policy is revolves around lower growth target rates and is focused on closing the gap between manufacturing and consumption growths. Such gap has led to the impoverishment of consumers. According to the Wall Street Journal, the problem is that “wealth is being transferred from households to the government, instead of the other way around.”
While measures such as the reduction of interest rates are taken in order to boost China’s economy, the c
ountry remains on a critical situation, and its already weak political system is in the spotlight. An example of China’s weak political systems, the Hukou, is analyzed by Tom Miller in China’s Urban Billion. Miller stresses that millions of Chinese citizens (and consumers) are victim of the institutional discrimination inherently tied to the Hukou, and their pockets are tight. Their lack of access to public education and healthcare constraints their capability to contribute to the economy.
Having this into consideration, the government promised to increase its spending on “pensions, health insurance, unemployment benefits and other social transfers, encouraging citizens to consume more and feel more secure.” By improving the prospects for the future, the government can trigger consumer spending and furthermore, prevent the increasing amount of business acquiring debts to go under in the close future.
Sources:
http://www.wsj.com/articles/the-coming-chinese-crack-up-1425659198
http://www.wsj.com/articles/china-lower-growth-target-puts-country-on-long-slow-road-to-reform-1425579417
In a financially repressed system, access to credit matters more than the interest rate. Who can actually borrow at this rate? only banks? favored SOEs?
More generally, as we’ve learned in the US, interest rates alone tell us nothing. Yes, the Fed can push short-term rates to zero. But does anyone want to borrow? Long-term (7 yr) rates at 2% suggest the answer is at least in part “no” (and in part a combination of very low inflation and low growth). So we need to know both supply and demand, and whether institutions are such that interest rates serve as an equilibrating mechanism (rather than credit rationing). [E.g., in China there is no small business lending except through shadow finance.]