OPINION

Not the Old Path

A series of stimulus policies are coming out. Monetary policy may be fine-tuned, construction of several major projects is to be restarted, policies of expanding domestic demand may be adjusted, taxes will be further reduced, and the threshold for private capital to enter more sectors will be lowered.

Judging from the mid- and long-term effect, the policies to be adopted also include increasing investments in infrastructure in west and rural China to increase residents' disposable income; continuing the structural tax cuts and establishing a long-term mechanism for boosting domestic demand to sustain economic growth. This indicates that the new round of stimulus policies emphasize improving people's livelihood, such as broadband Internet connection to households, healthcare and medical service, education and the construction of affordable housing.

Some people may have a different understanding toward the new round of stimulus policies, which can lead to neglect of mid- and long-term goals. For instance, after seeing the insufficient newly added loans in April and May, some analysts suggest the central bank intensify macrocontrol efforts through monetary policies, including further lowering the reserve requirement ratio to inject more liquidity into the market and lowering the benchmark interest rate to stimulate companies' desire to invest more.

This viewpoint doesn't get the essence of the new round of stimulus policies; neither does it understand the role that China's monetary system and interest rate are playing to the market.

China's monetary and interest rate systems are totally different from developed countries. The benchmark interest rate is the one-year deposit rate in banks, which is a direct control to the risk pricing of commercial banks.

But in most countries, the benchmark interest rate refers to the inter-bank lending rate, which can only influence the bank deposit and lending rates after several rounds of transfer. Besides, China also has regulations of upper limit for deposit interest rates and lower limit for loan interest rates.

Competition between Chinese banks doesn't focus on the price but on the scale of loans. The reserve requirement ratio has become the most frequently used instrument by the central bank. Right now, the dwindling bank lending is not because the interest rate is high. Instead, banks are reluctant to lend due to the risks.

Therefore, if we hope to loosen bank credit to stimulate economic growth, we will go back to the old path from 2008, when credit expansion was adopted to stimulate the economy. As soon as we loosen the monetary policy, a new round of rampant credit expansion is bound to happen.

With a target of 8 trillion yuan ($1.26 trillion) in bank loans in 2012, new stimulus policies shouldn't focus on loosening the current monetary policy, but fine-tuning it to make the bank loan return to the normal level. Otherwise, "steady growth" can not be achieved and side effects will appear, just as what the excess credit expansion in 2008 brought to the Chinese economy. We shall never take the old path.

This is an edited excerpt of an article by Yi Xianrong, a finance researcher at the Chinese Academy of Social Sciences, published in the Economic Information Daily

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