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Sunday, September 8, 2019

Why is making an interest rate policy a difficult task in China?

China has different provinces with different economic growth and each province has different tiered cities (tier 1, tier 2 & tier 3) which have different property prices.

2018 GDP numbers in China provinces:

China was growing at 6.6% in 2018 but its provinces were growing at different rates.  Tianjin was growing at 3.6% (below the country 6.6%) while Guizhou and Tibet were growing at 9.1% (above the country 6.6%).  Each province has its own tiered cities with different property prices.

When China cuts/raises its interest rates, the rates will have to be applied across the board and each province will be impacted differently.  For example, if China cut its interest rates, Tianjin's GDP growth (3.6%) might grow closer to the national rate (6.6%) which was good for Tianjian but Guizhou's GDP growth (9.1%) might be inflated to the extent that it became an overheating economy which was bad for Guizhou.  The interest rate changes would also impact the property prices in the different tiered cities in each province.

Therefore, the Chinese government has to assess the interest rates' impacts in each province first before making any change to the current interest rates.  The assessments will take time since every mayor has to report the impacts back to the central government for better decision making.

The SG government is glad that it is not facing such a difficult task.  Can you imagine SG has different GDP growth in each town?  What if Ang Mo Kio had a 9.1% growth while Chua Chu Kang had a 3.6% growth and each town had its own tiered cities?  Would the SG government be able to implement the property measures so easily?

4 comments:

Unknown said...

There are national level & localised level tools.

Interest rates are national level.

However policies like property controls, land sales, infrastructure project approvals, factory investment approvals etc can & are localised for different provinces & cities.

Previously most provincial & city officials ignored beijing dictates to tighten & deleverage as making money thru bribes, kickbacks, undertable money & "admin fees" was too tempting. But has been greatly reduced after anti-corruption drive.

Interest rate & foreign reserves are the big bullets that beijing will hold back until the economy becomes even worser.

China is not the only big country with different areas of various economic growth & developments. Even the developed US has towns, cities & large areas where the economic development is more like 3rd world. They just have to deal with changes in national-level policies the best they can, based on maturity of governance and depth & breadth of existing financial and social support systems.

Eric Ho said...

oh! The goal pole has shifted....no more SG vs China?

The central government has to get feedback and reports from the provincial mayors before any major policy implementation that will affect the country. The central government cannot just implement a blanket policy and expect every provincial mayor to adjust their local laws to overcome the problems caused by the central government policy. This is not the way to run a big country.

Anyway, time will tell who is right and who is wrong. Let's see how this will pan out.

Unknown said...

If Beijing wants, they can slash their interest rate overnight. It's not difficult & it's not like they never slash rates before. LOL!

Your reasoning is that it's very complicated for China to reduce rates, like trying to land a human on Mars, need to have committees of govt officials, data scientists, economists, business leaders, industry associations to debate, discuss, analyse, do quantum computer projections, backtesting for last 1000 years etc etc.

My reasoning is that it's due to conserving big bullets for now.

Eric Ho said...

You just don't understand economics at all.

If cutting the interest rate is so simple and easy like you said, the FED doesn't need to hold so many FED meetings at all to explain and justify the cut. The FED chairman can just go ahead to cut it. The decision-making process is a lot more complex than you think and must not be done lightly as it carries a severe consequence.

The FED governors don't even need to vote during the FED meeting to cut the rate since the FED chairman can do such a simple thing. However, this is not the way things are being done in the real world.