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Analysts call for stronger fiscal measures to boost demand

Huo Li

City view of Shanghai, China, October 29, 2024. /CFP
City view of Shanghai, China, October 29, 2024. /CFP

City view of Shanghai, China, October 29, 2024. /CFP

A new report by the think tank, China Finance 40 Forum (CF40), on Monday urged policymakers to accelerate interest rate cuts and increase government spending to boost demand.

China recently implemented a raft of measures, including interest rate cuts, to support economic growth. However, these measures have raised concerns about their potential impact on bank profitability.

Analysts argue in the CF40 report that reducing policy rates is necessary to address insufficient demand. While the central bank is mindful of the risks to bank profitability, the report contends that the costs of inaction could be even greater. Continued weak demand could lead to increased non-performing loans and further pressure on bank margins.

Over the course of this year, the five-year Loan Prime Rate (LPR), a key benchmark for mortgage rates, has been reduced by a cumulative 60 basis points in three separate cuts. Recent policy measures have included a 20-basis-point reduction in the policy rate and a 50-basis-point cut in the reserve requirement ratio for financial institutions.

"It is true that some financial institutions may face bankruptcy pressures," said Zhang Bin, a senior fellow at CF40. "However, this does not justify a reluctance to cut interest rates. The central bank can take necessary measures to address troubled financial institutions."

The report suggests that, to stimulate demand, government spending should exceed the combined growth target for GDP and inflation. Zhang explained that if China aims for a 5 percent GDP growth rate and a 2 percent inflation rate next year, broad-based government spending should grow at a rate exceeding 7 percent. In the years prior to the pandemic, the growth of China's broad-based fiscal expenditures exceeded 10 percent, Zhang added.

Guo Kai, a senior fellow at CF40, echoed Zhang's views, emphasizing the need for a nominal GDP target to address the challenges of a low-interest-rate environment. If real GDP growth slows, policymakers could then implement expansionary fiscal or monetary policies to boost inflation so as to maintain the economic momentum.

Analysts are optimistic about the recent comprehensive policy package. They believe that effective implementation of these measures will be crucial for maximizing their benefits, laying the foundation for future sustainable economic growth.

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