China has cut interest rates eight times since 1996, but the growth of social consumption is still far less than that of banking deposits.

The annual average growth of total retail sales has been riding at 10.72 percent in recent years, compared with the 16.98 percent for banking deposits.

The weak consumption resulted from residents' low expectation for their income growth. Meanwhile, the unsound social security system has forced most of the Chinese deposit their money in banks for future expenditure in housing, medical treatment and children's education.

Lowering interest rate has actually cut the residents' income further.

Based on the one-year deposit rate in 1999, Chinese can get 134.1 billion yuan (US$16.1 billion) of interest earning, which accounted for 13.58 percent of the total salaries they earned.

Although some people have non-salary income, for most of China's residents, especially laid-off workers and farmers, interest rate earnings has become an important source of income.

Lower interest rates and the application of interest rate tax has actually reduced the purchasing power of most Chinese residents.

Furthermore, the low interest rate policy has not promoted the investment of enterprises.

One of the major purposes for the interest rate cut is to lower the operation cost of the State-owned enterprises, improve their profitability and encourage them to expand investment.

Of course, the decrease of the production cost is an important element for the increase of the profits. But the increased profit resulted from the interest rate cut is limited. High investment return mainly relies on market demands and prices. Without strong consumption demands and stable price, the growth for investment return is limited.

The experience in past years has shown that the interest rate change has no strong relationship with the fixed-assets investment. The growth of the increased investment in past years was mainly from the expansion of government expenditure instead of enterprises.

Another noteworthy issue is that the low interest rate has not usher bank credits into enterprises.

In recent years, the gap between credits and saving in banks has been increasing. Meanwhile, the growth of individual savings has been much faster than that of the credits.

Wang Kangmao, a professor of finance with the Institute of Management under the Zhejiang University.

(China Daily January 6, 2003)