Following a series of disappointing Chinese economic figures in recent weeks, there have been calls that Beijing should undertake more monetary easing measures.
While the demands from market participants are not surprising, we should however examine if such moves are the right prescription.
Are interest rate and reserve requirement ratio (RRR) cuts a good or bad thing? And can the cuts save the Chinese economy and the stock market?
Rate cuts are just one tool to lift a sagging economy.
If a healthy person consumes too much tonic food, he will grow fat. Then, if the person finds that his clothes have become a bit tight, should he immediately seek a new wardrobe or should he work out to get back in shape?
China’s growth has slowed as the old development model has come to the end while the new model is still not strong enough to support the economy.
Rate cuts will have short-term stimulating effect, but will they help the reform process?
Interest rate reductions will help reduce the borrowing costs for companies, but the ultimate beneficiaries may not be those who deserve the aid.
Given the realities of state-owned enterprises in China, lower rates may actually help businesses carry on with their outdated capacities.
A person who has become bloated could buy bigger-sized clothes and seek an easy way out. But what he really needs to do is eat healthy and do more workouts.
The same principle applies when it comes to economic transformation. You have to change your habits even though the process might involve some pain.
What China needs is reforms, not “opening the tap”.
The main reason people invest in the mainland and Hong Kong stock markets is the promise of the Chinese economy and good valuations. But if the outlook is negative, who would want to invest?
Would you favor a healthy-looking person? Or an ailing, overweight person?
Ultimately, investment decisions will be based on how far China is prepared to go in its reforms drive.
Reduction in import taxes, simplifying the approval procedures, opening up monopoly industries and reforms in state firms are some of the things that will determine the attractiveness of Chinese stocks.
Adapted from an article that appeared in the Hong Kong Economic Journal on Nov. 18.
Translation by Myssie You
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