The Case for China to Raise Interest Rates

And avoid Japan's "Lost Decade"

It is well known that Chinese leaders view Mikhail Gorbachev’s dissolution of the Soviet Union as a cautionary tale. That fear, coupled with the lessons of the Asian Financial Crisis, slowed the pace of China’s economic reforms, and simultaneously increased the power and control of the Chinese Communist Party.

As China’s phenomenal growth declines, like Japan’s after its dramatic postwar expansion, should Beijing be looking at Tokyo’s historical responses to slower growth, deflation, asset bubbles, and a stagnating stock market? Should the PBOC (People’s Bank of China) study Japan’s monetary policy successes and failures before it cuts interest rates, as it is widely expected to do shortly?

The simplest reason for the PBOC to abandon this plan is that it is unlikely to work. No matter how low rates go, there is just no demand for new loans. In 2023, according to @ChinaBeigeBook:

Corporate credit costs in Q1-23 plummeted, the sharpest one-off fall we had ever seen in CBB history. Response by firms? No material pickup in borrowing. Rates stayed at those low levels in Q2/Q3. Response by firms? No material pickup in borrowing In Q4 rates hugely fell yet again. Response by firms? No material pickup in borrowing And none of this led to any meaningful pickup in economic activity. Even after ending Covid Zero!