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      1. Home > News  Industry News

        Economists: Interest reforms let market decide


        In recent years, the relationship between China's economic growth and two key indicators - power consumption and freight volume - has attracted extensive attention both at home and abroad. In the "new normal", elasticity coefficient between economic growth and the two indicators is undergoing some changes, where the discrepancy, to some extent, reflects the progress made in industrial restructuring and upgrade. However, their orientation significance and logical relations, as well as rules and effectiveness, tend to remain unchanged.

        Changes consistent with economic growth in general

        Power consumption growth is basically synchronized with economic growth. From 1998 to 2007, China's year-on-year GDP growth rate increased from 7.8 percent to 14.2 percent, while the overall power consumption also took on a growing trend. In 2008, due to the international financial crisis, the country's economic growth rate dropped sharply, so did the growth of power use. Backed by massive stimulus policies, economic growth picked up from 2009 to 2010, when the power consumption also grew faster. From 2011 to 2015, both economic growth and power consumption slowed. Econometric analysis shows the correlation coefficient between total power consumption and GDP growth stood at 0.741 during 1998-2014, and that between industrial power use and industrial value-add growth hit 0.898.

        Freight transportation moves similarly to economic growth. From 1998 to 2007 when China's economy experienced a sustained rapid development, the railway freight volume grew from the bottom point of 1988 and kept increasing rapidly despite some fluctuations. From 2008 to 2009, due to economic slowdown, the freight volume growth rate dropped significantly. From 2011 to 2015, economic growth and freight volume growth both fell. Econometric analysis shows the correlation coefficient between freight volume and GDP growth reached 0.646 during 1998-2014, and that between the freight volume and the industrial value-add growth reached 0.760.

        The moves of China's central bank to remove controls on deposit interest rates and lower the one-year benchmark interest rates on Friday are designed to let the market decide financing costs, marking a significant step in overall economic reform, experts said.

        The announcement, by the People's Bank of China, came as the bank eliminated the 50 percent over benchmark upper limit for deposit rates as it did for lending rates two years ago.

        Now commercial banks can set both their deposit and lending rates freely.

        It was the sixth benchmark interest rate cut by the central bank in one year-a reduction of 25 basis points to 4.35 percent. The benchmark rate for one-year bank deposits was reduced by the same margin to 1.5 percent.

        Before that, the benchmark deposit rate was 1.75 percent, and commercial banks were allowed to set their own one-year deposit rates as high as 2.625 percent, or 50 percent above the benchmark.

        Commercial banks' average deposit rates were about 20 percent higher than the benchmark before Friday's move.

        Li Bo, head of the central bank's Monetary Policy Department, said, "Conditions are ripe now to break the last line of the deposit rates control."

        The current low interest rates provide a good opportunity for the reform because, in the short-term, it is possible to see rises of the deposit rates for commercial banks, Li said, "but the interest rate cut can help to ease the pressure" as there will be less room for further interest rate cuts.

        Wang Tao, chief economist for China at UBS AG said, "The full removal of the deposit rate's ceiling marks a de jure completion of China's interest rate liberalization, though we think it will take longer and more effort for interest rates to be de facto fully determined by the market."

        "We think the latter requires the breaking of widespread implicit credit guarantees, reforms in the SOE and financial sectors and the development of a more price-based monetary policy regime," she said.

        The nation has been undergoing financil reform since 1993.The core reform is a market-oriented interest rate system.

        Premier Li Keqiang addressed this in the annual Government Work Report in March this year to accelerate the interest rate liberalization process.

        After the reform, interest rates will affect the macroeconomic environment and effectively allocate resources in the financial market, economists say.

        Zhu Ning, a professor at Shanghai Jiaotong University, said interest rate liberalization will support the development of competitive and high-quality enterprises while facilitating industrial upgrading and the wider economic restructuring.
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