MNI 5 Things: China Should Sharply Cut Reserve Ratio: Official

     BEIJING (MNI) - The following lists five things we learned from Li Yang, a

former member of the People's Bank of China's Monetary Policy Committee and now

director of the Finance Institute of the Chinese Academy of Social Sciences. Li

is also a prominent advisor to Premier Li Keqing's government. 

     - On China should lower required reserve ratios: China can adjust the

required reserve ratio without changing interest rates. The required 17% ratio

is too high and should be lowered on a large scale. It was set when foreign

exchange reserves were increasing by $100 billion to and $500 billion each year.

Now the situation has reversed. The authorities are also considering this

option. With RRR as a liquidity buffer, China doesn't need to respond to the

Fed's rate hikes by raising its own costs of borrowing, but adjust according to

the cost and liquidity situation of domestic companies.

     - On the decline of the growth rate of Chinese residents' savings: It is a

very dangerous signal, mirroring what happened in the U.S. debt crisis in 2008,

when its residents became heavily indebted. Individuals' surpluses support the

government and businesses and keep the economy functioning properly. If all

three above became indebted, economic growth can only rely on inflation, which

leads to financial crisis. 

     - On debt: China's many state-owned enterprises and listed companies

continue to increase leverage and carry out stimulus policies. These companies

often speculate on real estate. China should have SOEs' borrowing effectively

under control. However, China's overall leverage ratio and local government debt

are under control and expected to fall further under strong policies this year.

     - On opening-up: China is allowing foreign capital to have controlling

stakes in the financial sector, although the timing hasn't been decided. The

other step, which may be slower, is allowing foreign capital to enter domestic

capital, stock and bond markets. The roadmap is clear.

     - On Chinese currency: China generally hopes the yuan will remain stable

against a basket of currencies. The dollar hasn't been stable because the U.S.

economy faces many problems, which it has partly blamed on China. China

certainly won't repeat the mistakes of Japan, when it bowed to U.S. pressure and

let the yen sharply gain, resulting in Japan's "lost two decades." 

     - On U.S.-China trade war: The U.S. has initiated the 301 investigation for

the sixth time and succeeded in the first five times. China won't accept it this

time. China will steadily open up at its own pace. If the two sides engage

deeper in a war, neither side can stand it. China's dependence on foreign trade

is no longer so high. Total imports and exports account for less than 30% of the

GDP and 2.6% of the growth, which is already quite low. So for goods and

services, China isn't particularly afraid of what others may do to itself. Also,

given China's strong current account positions, it can withstand much greater

impact than before, so capital outflow won't be an significant issue.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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