China Leaders Seen Deepening Interest-Rate Flexibility: Economy
China’s new leaders may further loosen interest-rate controls this year while allowing limited changes to one-child and household-registration policies that threaten to restrain growth, a survey of analysts shows.
Twelve of 16 analysts expect China to relax or remove the cap on deposit rates or the floor on lending rates, according to a Bloomberg News survey conducted ahead of Xi Jinping’s appointment as president tomorrow. A majority sees at least minor changes to the birth and registration policies.
Reduced restrictions on banks competing for deposits may boost returns to China’s savers, aiding efforts to switch the economy’s engine of growth to consumer spending from exports and investment. Xi and incoming Premier Li Keqiang may be more cautious on changes to the one-child policy and the so-called hukou system, which denies education and social welfare benefits to millions of migrant workers in cities.
“Financial-market reforms should continue because there aren’t so many political or technical stumbling blocks,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong and a former World Bank researcher. Hukou changes are “more complicated” and the one-child policy is so entrenched in Communist Party thinking that “it’s not so easy” to leave behind, he said.
China’s leaders, set to complete a once-a-decade handover of power at the meeting of the National People’s Congress in Beijing that ends March 17, are trying to support a rebound in growth from a 13-year-low without spurring excessive inflation or risks in the financial system.
Any move on interest-rate flexibility would build on changes last year. The People’s Bank of China allowed banks to offer a discount of as much as 30 percent on the key lending rate, up from a previous 10 percent. For the first time, the central bank permitted deposit rates of as much as 10 percent higher than the benchmark.
Twelve analysts expect a raising or removal of deposit-rate limits and 10 project a lowering or removal of the lending-rate floor, according to the survey conducted from Feb. 28 to March 5. Five said the PBOC is likely to make a market-based interest rate, such as a repurchase rate, into a new benchmark rate. The one-year lending rate has been 6 percent since July, while the one-year deposit rate has stood at 3 percent.
The Shanghai Composite Index dropped 1.2 percent to 2,260.19 at the 11:30 a.m. local-time break, extending a four- day, 2.6 percent slump and erasing its gain for the year. Investors are concerned that efforts to cool the property market will undermine the nation’s recovery.
Yao Wei, China economist at Societe Generale SA in Hong Kong, said that “interest-rate liberalization is the cornerstone of financial-market liberalization -- if you don’t have market-determined prices it’s hard to develop anything else.” She predicts a removal of the lending-rate floor and a higher deposit-rate cap.
More-flexible interest rates may improve the flow of capital to small and mid-sized companies, private firms and those in services, Kuijs said.
Reforms may be less sweeping for the policy that has restricted most Chinese families to one child since the late 1970s on the theory that rapid population growth would constrain resources. The policy has left the new leaders having to contend with an aging population and a declining workforce.
Eight of 16 survey respondents see minor changes such as adding categories of citizens who can have more than one child, or regional adjustments. Three expect major changes such as letting everyone have two children.
Some loosening may be in progress. Seven provinces and cities including Zhejiang and Shanghai are letting couples in both rural and urban areas have a second child if either parent is an only child, according to a report yesterday by the Renmin Zhengxie Bao, a newspaper published by the National Committee of the Chinese People’s Political Consultative Conference, citing Yang Yuxue, an official at the National Population and Family Planning Commission.
The survey preceded the government’s revamping of several agencies, including combining family planning, which was responsible for administering the one-child policy, with the health ministry. Lu Ting, chief Greater China economist at Bank of America Corp., said the shift makes a change to the policy more likely.
Thirteen of 16 analysts expect minor hukou-system changes, such as increasing quotas for changing to urban registration. The policy prevents migrant workers from using services such as enrolling children in schools in the area where they work.
Premier Wen Jiabao’s final annual report last week to the legislature “doesn’t really suggest a breakthrough in the one- child policy and hukou system,” even as there’s increased recognition of the birth policy’s negative effects, Kuijs said.
Wen’s address didn’t discuss specific changes to the one- child policy, saying China “should adhere to the basic state policy on family planning.” He said China should “accelerate reform of the household registration system.”
Hukou changes are more complex in part because local governments would have to increase spending and have access to bigger revenue streams, Kuijs said.
Sun Xianzhong, a Shanghai delegate to the legislature and researcher at the law institute of the Chinese Academy of Social Sciences, said in an interview that reform of the hukou system needs to be “pushed forward with great efforts.”
In other major economies today, releases will include U.S. mortgage applications and retail sales, euro-area industrial production and French inflation.
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