Negative influence of the negative-interest-rate era on China
Zhong Jing
According to the statistics, due to the influence of price upswing of grain, edible oil and building materials at the end of last year, the inflation rate exceeded 3 percent in March this year. At the same time, Zhou Xiaochuan, the president of the People's Bank of China, decided not to enhance the interest rate. China has entered into the era of negative interest rate again. Negative interest rate does bring some positive influence. However, its negative influence is much deeper.
As for the positive influence, negative interest rate will stimulate and arouse the financing concept of the common people, especially of the middle class and the rich. They will try all kinds of financing means to avoid the shrink of their actual wealth influenced by inflation. Therefore, they will draw their money out of banks to buy stocks, capital fund, real estate, even jewelries, gold and artworks in order to preserve and appreciate the value.
However, it is the change based on the financing concept of "getting money out of money" that encourages many people of middle-class and rich to draw their money out of banks and invest in stock and real estate, unquestionably deteriorating the foam in Chinese stock and real estate markets and compounding inflation.
The foam in the Chinese stock market are mainly reflected by the inappropriate high price/earning ratio and low cash return ratio. In 2001, the average price/ earning ratio reached 67 times in both Shanghai and Shenzhen stock markets in China. This has almost been the highest ratio in the world. However, such a high price/earning ratio has not given rise to listed companies of the greatest potential. If we distribute profits and calculate the total market value based on the principle of "the same stocks, the same right"”, foam of Shanghai stock market can be removed and the same level of the foreign mature markets can be reached only when its stock exchange index is around 600 points.
The dividend rate in Shanghai and Shenzhen markets is much lower than the time deposit rate of the banks and bond rate of the national debt in the same period, and profits of those listed companies are too low.In 2000, the profits of the listed companies only totaled to more than RMB 50 billion, among which only about more than RMB14 billion could be distributed as dividend (tax included). Hence the stock prices are seriously distorted. Due to the unhealthy development of the capital market and rather single investment channel, the distorted phenomenon of stock prices has already existed for a long time, resulting in the long-standing foam in the stock market.
The current negative interest rate in China will impel many depositors and individual investors to translate part of their money into purchasing funds and bonds. Besides, they will invest large sum of money in the domestic stock market which is full of foam. According to the latest statistic data released by China National Securities Supervision and Management Committee on March, 15th that up to the end of February, 70,763,600 accounts had been opened by the investors in Chinese securities market, with an increase of 364, 900 new accounts compared with January, establishing a new record as for increase of new account openers in a single month in recent years.
In February, the trading sum of stocks in the Chinese securities market amounted to RMB 712.917 billion yuan, marking an increase by 339.83 per cent compared with the same period in the previous year. The insiders pointed out that negative interest rate encouraged the investors' entrance into the stock market. However, because many domestic blue chip enterprises such as PetroChina, Sinopec and China Mobile went listed in the domestic market, and the QDII mechanism has not been put into operation in China yet, there are only a few blue chip enterprises in China meanwhile other enterprises'performances are not satisfactory. Therefore, the rapidly increasing investors will push up the stock prices and further result in foam phenomenon in Chinese stock market.
Besides stock, investing in real estate is another important way of value increment chosen by investors. However, foam also occurred in the field of real estate several years ago in China. In 2003, the growth rate of investment in real estate came up to 30 percent, being several times of that of the GDP. According to the examination and calculation by experts, the financial organizations spent about more than RMB 600 billion on real estate development and individual housing loans surplus, accounting for about 10 per cent of the total loans from the financial organizations.
The occurrence of negative interest rate will compound the foam phenomenon in real estate. On the one hand, the occurrence of negative interest rate will encourage the real estate developers to seek more bank loans since they hold that they can benefit from the inappropriate low interest rate once the house prices go up and real estate development will be accelerated as a result. On the other hand, because house purchasing has the possibility of value increment and thus can counteract the loss resulting from negative interest rate and even bring a small fortune if there comes the chance.
This way of thinking will aggravate the speculation in real estate. Because one only has to pay 20 to 30 percent of the total price of the house property in cash and the rest relies on bank loan, then the greatest fascination lies in leverage which attract great benefits by low cost. Those houses, which enjoy favorable locations and great potential, will undoubtedly attract many investors. The prices of these houses, as a result, will be pushed up so that foam in the real estate field will be compounded.
The consumers are likely to reduce their current deposits and increase consumption because of negative interest rate. If the change take place in a large scale and for a long time, then it's very easily to result in accelerated price upswing and serious inflation.
From the perspective of investment, long-standing negative interest rate will bring about over-investment and worsen the inflation due to the modest loan rate and low investment cost.
From the perspective of production, high inflation rate will encourage enterprises to store their products. Not only will the dealers in the circulation field purchase and store goods, but also will the producers store products, thus result in further advancing of the commodities’prices base on the original advancing rate of 3 per cent. Due to high sensitiveness of stock to the interest rate, the prices of staple commodities such as copper and grain rocketed in the futures market recently.
If the negative influences brought about by negative interest rate cannot be removed for a long time, then the economic development and social life will be deeply affected.
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