China's government wants to fight inflation and redistribute income, giving households a bigger slice of the pie. Higher interest rates would achieve both. That's not, apparently, how Beijing sees it.
Parsing the language in Chinese government communiqués is never easy. But Premier Wen Jiabao's work report, delivered to the National People's Congress on Saturday, certainly didn't suggest much higher interest rates were likely.
Instead, pride of place goes to "creating a good atmosphere for transforming the pattern of economic development." That suggests the government believes buoyant growth is necessary to cushion the impact of vital but painful reforms to increase the share of domestic consumption in GDP. Further increases in interest rates could be limited.
At first blush, that makes some sense. More resources for households means less for the industrial sector, the driver of growth in the Chinese economy for the last 30 years. Hammering industry with higher interest rates at the same time could be a recipe for disaster.
But by trying to have everything, Beijing risks ending up with nothing. Going slow on rate increases might leave the government's targets on inflation and raising household income unfulfilled.
On inflation, it is too early for the government to declare mission accomplished. Higher oil prices, higher wages for workers, and a global liquidity glut all suggest bringing prices under control won't be as simple as releasing a little grain from the reserves.
Even if Beijing does succeed in keeping increases in the consumer-price index in line with its 4% target for the year, holding interest rates low will do little to put more cash in households' pockets. Increasing one-year deposit rates by half a percentage point, as many economists expect the central bank to do this year, would still leave them at 3.5%, below even the acceptable rate of inflation. These negative real interest rates are effectively a tax on China's households, which do most of the saving, and a subsidy to government and business, which do most of the borrowing. In 2010, the real interest rate for savers with one-year fixed-term deposits averaged minus-1.1% over the course of the year. For demand deposits the real interest rate was minus-2.9%. Apply those numbers to the net level of household deposits, and the implicit tax on households last year adds up to tens of billions of dollars.
That inequity is one of the main causes of the skewed income distribution the government says it wants to address. Keeping interest rates low means keeping household depositors in the red and easy money flowing to business borrowers, hardly a good start for the redistribution agenda.
Parsing the language in Chinese government communiqués is never easy. But Premier Wen Jiabao's work report, delivered to the National People's Congress on Saturday, certainly didn't suggest much higher interest rates were likely.
Instead, pride of place goes to "creating a good atmosphere for transforming the pattern of economic development." That suggests the government believes buoyant growth is necessary to cushion the impact of vital but painful reforms to increase the share of domestic consumption in GDP. Further increases in interest rates could be limited.
At first blush, that makes some sense. More resources for households means less for the industrial sector, the driver of growth in the Chinese economy for the last 30 years. Hammering industry with higher interest rates at the same time could be a recipe for disaster.
But by trying to have everything, Beijing risks ending up with nothing. Going slow on rate increases might leave the government's targets on inflation and raising household income unfulfilled.
On inflation, it is too early for the government to declare mission accomplished. Higher oil prices, higher wages for workers, and a global liquidity glut all suggest bringing prices under control won't be as simple as releasing a little grain from the reserves.
Even if Beijing does succeed in keeping increases in the consumer-price index in line with its 4% target for the year, holding interest rates low will do little to put more cash in households' pockets. Increasing one-year deposit rates by half a percentage point, as many economists expect the central bank to do this year, would still leave them at 3.5%, below even the acceptable rate of inflation. These negative real interest rates are effectively a tax on China's households, which do most of the saving, and a subsidy to government and business, which do most of the borrowing. In 2010, the real interest rate for savers with one-year fixed-term deposits averaged minus-1.1% over the course of the year. For demand deposits the real interest rate was minus-2.9%. Apply those numbers to the net level of household deposits, and the implicit tax on households last year adds up to tens of billions of dollars.
That inequity is one of the main causes of the skewed income distribution the government says it wants to address. Keeping interest rates low means keeping household depositors in the red and easy money flowing to business borrowers, hardly a good start for the redistribution agenda.
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