In the midst of fluctuating global economic conditions and domestic shifts in economic structure, the interest rate policies in China are undergoing a significant transformationRecent years have seen an unmistakable trend of declining interest rates, prompting an inquiry into the forces driving this shift: Is it the deep transformation of industry or the policy demand to stimulate economic growth?

As the economy transitions towards high-quality development, adjustments in interest rates are not merely a simple monetary policy choiceRather, they are a product of the combined efforts of industry transformation and economic stimulationThis article sets out to analyze the fundamental reasons for the continued decline in interest rates from the perspectives of industrial transformation and economic stimulation, while exploring the far-reaching impacts of this trend on both the economy and the financial markets.

The first angle of analysis pertains to industrial transformation and the adjustment of economic structures.

China is currently navigating a crucial phase, transitioning from a period of rapid growth to a focus on high-quality growth

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This means moving away from reliance on traditional low-cost labor and heavy industries to sectors with higher added value, such as high-tech industries, green energy, and services.

To support this transition, monetary policy must continue to maintain low interest rates, thereby fostering technological innovation, business investment, and consumption upgrades while mitigating the shocks that may occur during this transitional period.

Drawing parallels with Japan in the 1980s, Japan faced challenges such as bursting economic bubbles, a debt crisis, and the need for industrial upgrade following decades of high-speed growthTo stabilize its economy and facilitate industrial transformation, the Bank of Japan kept interest rates low and implemented various financial stimulus policiesThis low-interest rate environment injected liquidity into the Japanese economy, maintaining stability in the financial market and providing funding support for businesses engaged in technological innovation and industrial upgrades.

Similarly, in the aftermath of the 2008 financial crisis, the United States adopted low interest rates to spur economic recovery, thus supporting growth in innovation-driven enterprises and the tech sector

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The European Central Bank also embraced a looser monetary policy following the European debt crisis, which proved pivotal in optimizing industrial structures, particularly as manufacturing shifted toward high-end production and services.

Across the board, Japan, the U.S., the UK, and Europe have experienced a general decline in interest rates from 1980 to 2020, especially since 2000, with rates hitting all-time lows, including periods of zero and even negative interest rates lasting over a decadeThis trend coincided with significant industrial upgrades as these regions transitioned from traditional manufacturing to high-tech industries, where low interest rates provided the necessary fertile ground for development.

Meanwhile, China's rapid economic growth over the past few decades has relied heavily on large-scale infrastructure development and traditional manufacturing

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Yet, as economic growth begins to slow and issues such as excess capacity and environmental pollution escalate, China finds itself in need of promoting industrial upgrades and investing in high-tech, service, and green economies.

Low interest rates are essential in stimulating corporate investment and innovation, particularly in high-tech and environmentally sustainable projectsBy 2023, China's digital economy had already reached nearly 47.2 trillion yuan, accounting for approximately 40% of GDPThis industrial transformation requires substantial financial backing, and low interest rates can facilitate low-cost financing options for businesses, thus supporting innovation and technological advancements.

The second area of focus involves structural reforms driven by low interest ratesMaintaining low interest rates does more than promote industrial transformation; it also supports profound changes in economic structure.

For instance, reforms in the financial system, deepening of capital markets, and state-owned enterprise reforms can all be accelerated in a low interest rate environment

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Lower financing costs relieve pressure on companies, especially small and medium-sized enterprises, driving economic diversification and efficiency.

During Japan’s “lost decade,” the combination of low interest rate policies and fiscal measures enabled the government to drive significant infrastructure investment and catalyze financial system reformsHowever, due to inadequate structural reforms and poorly managed foreign exchange regimes, Japan's economic recovery was sluggishNonetheless, low interest rates created room for industrial upgrades and economic restructuring.

In the cases of Europe and the United States post-2008 financial crisis, low interest rate policies, accompanied by quantitative easing measures, effectively stimulated economic recovery while fostering structural reformsIn the U.S., for example, low interest rates underpinned a rebound in the housing market and facilitated the transformation of manufacturing towards tech-intensive sectors.

As China embarks on its own industrial transformation journey, maintaining low interest rates alongside structural reforms can optimize resource allocation and drive growth in green industries, high-tech sectors, and services

This approach also draws upon lessons learned from experiences in other countries.

The second angle pertains to stimulating economic developmentThe relationship between economic pressures and the necessity for low interest rates is particularly evident amidst the current global economic slowdown, characterized by insufficient domestic demand, a languishing real estate market, and weak export performance.

To stimulate economic growth, it is essential for domestic policies to continue employing low interest rates, thereby reducing financing costs for businesses and consumers while promoting investment and consumption growth.

Since the 1990s, Japan has been grappling with persistent economic stagnation and deflationIn light of this, the Japanese government has turned to low interest rate policies coupled with quantitative easing to foster economic growth

Despite enduring deflationary pressures in the long-term low-interest-rate environment, these policies have managed to sustain minimal economic growth and offered support for corporate investments.

In a similar response, Europe and the United States adopted widespread low interest rate policies post-2008 to combat potential economic recessionsThe Federal Reserve's measures of maintaining low rates and enacting quantitative easing effectively stimulated consumer spending and investment, resulting in a recovery of the U.SeconomyEurope also saw similar monetary easing initiatives take place throughout the 2010s to counter the economic pressures of the debt crisis.

Despite China's economic growth still outpacing that of most developed nations, the slowdown amidst the global economic challenges necessitates a continued reliance on low interest rate policies

By stimulating internal demand, fostering investment and consumption, China can maintain stable economic growth despite the rising uncertainties in the external environment.

The final consideration is how low interest rates promote both consumption and investmentBy lowering financing costs, low rates act as a catalyst for corporate investment while encouraging consumers to increase borrowing and thus spendingThis stimulative effect is particularly crucial for a massive consumer market like China.

As consumer demand softens and the aging population trend intensifies, low interest rates could invigorate consumer confidence and enhance corporate investment willingness, thereby spurring momentum for economic growthAccording to the National Bureau of Statistics of China, retail sales of consumer goods in 2023 recorded an approximate growth of 4.5%. Although this growth rate remains relatively subdued, low interest rates can motivate consumers to increase their spending and drive companies towards investing more in emerging sectors such as technology and green industries.

In conclusion, the dual perspectives of industrial transformation and economic stimulation provide a compelling explanation for China's potential continuation of low interest rate policies