Let interest rates play their role in economy
By Yi Xianrong (China Daily)Updated: 2007-06-01 10:07
If capital takes the position of labor in material production at a higher than normal speed, it would dampen China's comparative advantage as a country with rich labor resources. Employment will be hurt, which in turn hurts consumer spending.
As a result, the low interest policy actually encourages social wealth to flow into capital-intensive sectors, like real estate. When ordinary people have to spend a large portion of their income on real estate, they do not have enough money to spend on other items.
Despite the potential damage to the economy, the low interest rate is maintained under strict control.
The authorities are doing so out of various concerns. When the interest rate is raised, businesses may face higher costs, global speculators may be encouraged to enter China, and consumers will decrease their spending. All these possibilities increase the risk of a hard landing for the economy.
However, the interest rate, as the essential factor in the financial market, should be given more room to play its role in allocating financial resources. The authorities must make an all-out effort to overcome the obstacles and recover the due function of the interest rate as an important policy tool.
The difference between interest rates on deposits and loans should also be narrowed so that the banks will have less incentive to lend. Thus, the overheating of the Chinese economy as well as the capital market could be slowed.
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