A timely article.
Academics Get Caught Up in Debate Over China’s Interest Rates - China Real Time Report - WSJ
- September 16, 2014, 10:54 AM HKT
Academics Get Caught Up in Debate Over China’s Interest Rates
The national flag of China flutters behind a fence of the headquarters of the National Development and Reform Commission (NDRC) in Beijing, in this July 12, 2013 file photo.
Reuters
The central bank’s push to liberalize interest rates is running into an unexpected new problem – opposition from some prominent Chinese economists.
The academics, who usually back market-oriented reforms, don’t oppose freeing deposit rates per se. Rather, they say, interest rate liberalization should be a lower priority than other changes.
“My argument is that China should achieve much fuller currency flexibility before achieving full interest rate liberalization,” says Guonan Ma, a Chinese-born and educated scholar at the Bruegel think tank in Brussels and a former senior economist at the Bank for International Settlements, an international organization of central banks in Basel Switzerland. Mr. Ma is influential back home on central banking issues. Yu Yongding, a senior economist at the Chinese Academy of Social Sciences, for instance, says he agrees with Mr. Ma’s priorities, as does He Fan, another senior CASS economist.
“I am less optimistic than [Chinese central banker]
Zhou Xiaochuan on interest rate liberalization,” says Mr. He.
Academics are always questioning government priorities, even in a country with as tight political controls as China. But opposition by prominent economists can have big political consequences in Beijing, where many in the government and party are wary that big institutional changes could further slow the economy. Opponents can seize on the academics’ arguments as a rationale to retain the status quo.
Opposition to freer flow of capital in and out of China by Mr. Yu and former World Bank chief economist Justin Yifu Lin, for instance, has slowed the central bank’s plans to ease capital controls, say Chinese officials. Messrs. Yu and Lin have argued that controls are important to protect China from massive inflows and outflows of money, which helped wreck other Asian economies during the financial crisis of 1997 and 1998. Acknowledging the opposition, PBOC officials now stress their ability to reimpose controls should problems arise.
Mr. Zhou, the central banker, has said that he wants to liberalize deposit rates, now capped at 3.3%, by the spring of 2016 as a way to put more money in consumers’ pockets and to increase competition among big state-owned banks. But his plan already faces formidable opposition from banks, who fear that their costs would rise and profit margins would shrink. The academics’ arguments help the bankers make their case without seeming as self-interested, say Chinese officials and economists inside and out of China.
“If a large bank goes to the State Council” – the Chinese government’s top decision-making body—“and says profits are getting squeezed, you’ll get one kind of hearing,” says a sometime adviser to the People’s Bank of China. “But if you have support from the academic community, you’ll get another kind of hearing.”
Given that Chinese political system, like any other, must pick priorities, Mr. Ma says reducing intervention in currency markets and allowing the yuan to float much more freely is much more important – and achievable—goal than freeing deposit rates.
“The Chinese economy currently needs a more flexible currency that could help absorb shocks, rather than a more volatile interest rate that could inflict damage on the economy,” he writes in a Bruegel paper. Even though the PBOC has tried to spook currency traders by engineering a fall in the value of the yuan earlier this year, he says, that’s not sufficient. Many traders still figure the central bank will prod the yuan steadily upward in value—and thus add to pressure for the yuan to appreciate even more.
When it comes to interest-liberalization, he has a number of qualms. The likely outcome of such a move would be to boost interest rates in China. Who would benefit? Big state-owned firms that are “less sensitive to interest rates,” he says, not private firms, which regularly complain they can’t get bank loans. Higher interest rates could also put further downward pressure on the economy.
Of course, not all economists agree with such reasoning. Nicholas Lardy, a senior economist at the Peterson Institute for International Economics, says that higher rates would actually benefit private firms because they are more profitable than state-owned ones. Banks would have more incentive to lend to the private borrower because they could afford higher rates. Such lending would help speed the transformation of the Chinese economy so it relies more on entrepreneurship and services, he says.
“The most important reforms are the gradual liberalization of deposit rates and the formation of more private banks,” Mr. Lardy argues in a new book about China’s state-owned firms called “Markets over Mao.”
