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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (8738)	6/10/1999 11:10:00 AM
From: don pagach	Respond to of 9980

Might the next stock market bubble be in....China? China Cuts Interest Rates To Boost Slowing Growth By IAN JOHNSON Staff Reporter of THE WALL STREET JOURNAL BEIJING -- Hoping to bolster flagging growth and further pump up its soaring stock market, China's central bank slashed interest rates -- the seventh rate cut in three years. China's central bank announced through the official Xinhua news agency that the benchmark one-year deposit rate would be cut to 2.25% from 3.78%, while the rate on one-year loans would be cut to 5.85% from 6.39%. The interest-rate changes take effect Thursday, the bank said. Unlike other countries, where interest-rate cuts usually spur borrowing, China has a primitive banking system where most credit is still allocated by the state. That means interest-rate reductions really affect deposits, causing savers to pull money out of banks to spend or invest elsewhere. But analysts noted that in recent years, cuts haven't spurred consumption. One reason is stubbornly high real interest rates. Soaring Deposits In April, the benchmark retail price index showed prices fell 3.5% -- the 18th consecutive month of falling prices. That means real interest rates are still nearly 6%, high enough to keep consumers' money in the bank. China has more than $700 billion in private bank deposits and bank deposits continued to soar, rising 19% in April. "Weak consumption is not because consumers don't have money but because they don't want to spend it," said Shawn Xu of China International Capital Corp. Facing layoffs at state companies, many Chinese are content to keep their money in banks -- no matter how low interest rates slip "Their future income is more uncertain at this point," he said. Another government goal may be more successful: boosting China's stock market. The Xinhua report said the cuts were aimed at "promoting" money flows out of banks and into the stock market. The government has used the market to help companies restructure, allowing some state-run companies to list and use the proceeds to lay off workers and upgrade equipment. A high stock market may also encourage elated investors to spend more, some economists say, citing evidence of this in the bull run of U.S. stocks. Rumors of the rate cut have already pushed China's stock markets up sharply in recent weeks. Prices for China's Class B shares, which are available to foreign investors, have surged about 50% over the past two weeks. Flagging Expansion The cuts came as China's stimulus program shows signs of running out of steam. Last year, the government issued $12 billion in bonds and ordered banks to increase lending by an equivalent amount. But now, most of that money has been spent, helping to send growth lower. The government said for example, that growth in industrial output slumped in April to under 9% after hitting double-digit figures at the start of the year. Overall, China's economy is likely to grow by just 6.3% for the rest of the year after hitting 8.3% during the first three months of the year, said Joe Lo, an economist with Citibank in Hong Kong. "China is going through a major adjustment period and growth isn't strong," Mr. Lo said. "Growth is likely to slow for the next two to three years as the economy restructures." --Peter Wonacott of Dow Jones Newswires contributed to this article.