MNI China Interview: BOCOM's Lian Guardedly Optimistic on Econ

--Bank of Communication Chief Economist Disagrees With 'New Cycle Theory' 

--Sees Yuan Ceiling At 6.46; Annual Appreciation Won't Exceed 7%

--Warns Bond Market To Turn Volatile on Tight Liquidity

     BEIJING (MNI) - The Chinese economy will face downward pressures for the

rest of the year and likely into next year and so its upward momentum in recent

months should not be labeled as a "new cycle" of growth, Lian Ping, chief

economist with Bank of Communications, the fifth-largest state-owned bank in

China, told Market News International in an exclusive interview.

     Lian is a regular participant in economic consultation meetings held at

China's State Council, which sets policy for the country. 

     The economy has been on an "L-shaped" growth track and is now approaching

the turning point toward sustained growth, Lian said. But he warned that a

number of uncertainties are likely to make it difficult to turn that corner.

     China's economy has struggled with various downturn pressures since 2011,

when its growth rate slowed below double-digits. Since then, GDP has decelerated

each year, hitting a 26-year low of 6.7% last year.

     However, the country's economy has shown great resilience since the start

of the year. The GDP expanded by 6.9% in the first half, up 0.2 percentage point

from last year -- well above the government's target for "around 6.5%" growth

for the year.

     LIAN UNCONVINCED BY 'NEW CYCLE THEORY' OF CHINESE GROWTH

     This unexpected spurt led Ren Zeping, chief economist at Beijing-based

Founder Securities, to extoll his "new cycle theory," arguing that China's

economy would enjoy an extended period of growth. The theory gained credence and

prompted wide discussion among Chinese economists and analysts. 

     Three main points back the theory. The first is that the government's

campaign to eliminate excess production capacity in heavy industrial sectors

like steel and coal has improved those sectors' profitability. Second, the

inventory levels of companies have dropped due to tightening liquidity and an

otherwise gloomy economic outlook; and third, the global economic recovery,

particularly in the U.S. and Europe, has revived external demand. Together, the

three factors mean a rejuvenation of the Chinese economy, Ren argues. 

     But Lian disagreed with the theory, saying "there is no obvious evidence of

the new characteristics for sustainable economic growth." 

     "What is more, the economic growth model is still highly reliant on

investment," Lian added.

     Lian pointed to several uncertainties ahead that pose a threat to the "new

cycle" predictions.

     "As a main pillar of the recent solid economic performance, exports could

weaken, even become a dragging force over the rest of the year, particularly as

the Trump administration seems to be making greater efforts to deal with the

trade imbalance between the two countries," Lian noted. "The two sides will both

make certain compromises via negotiations. After all, Trump still wants to be

re-elected, so he would be satisfied with a certain amount of progress in the

[negotiation] process" that leads to the U.S. importing fewer China-made goods.

     Another driving force for China's economy -- investment -- is also expected

to lose steam as infrastructure spending, a large component of recent growth,

slows and investment in the property sector edges down, Lian said.  

     Lian said one area that could prove a boon to China's economy is

consumption, considering that spending related to the property boom over the

past several years, such as purchases of construction materials, should continue

for at least the next year. 

     GDP growth should still come in as high as 6.8% this year based on the

strong performance in the first half of the year, with no substantial fallback

expected in the second half, Lian predicted. 

     PBOC TO DOMINATE NEW REGULATORY COORDINATION COMMITTEE

     One important move during the National Financial Work Conference in July

was the establishment of the Financial Stability and Development Committee

(FSDC), a cabinet-level organ under the State Council, which is tasked with

coordinating and supervising all of China's financial regulators.

     "Details on the FSDC will be unveiled after the 19th [Communist Party]

Congress, as the head of the People's Bank of China and relevant cabinet-level

officials will finally be settled," Lian noted.

     Working as the "office" of the FSDC, the PBOC will no doubt play a critical

role in its development, Lian said. 

     "The PBOC will be the only executive agency of the FSDC. It will take the

lead in making proposals and drafts for the FSDC's discussion and decision. It,

of course, will listen to the opinions of the three commissions, but it

definitely will maintain its own position as a priority." Lian said, referring

to the three other financial regulators -- the China Banking Regulatory

Commission, the China Securities Regulatory Commission and the China Insurance

Regulatory Commission. 

     But Lian said the FSDC will not be another National Development and

Regulatory Commission, now the only cabinet-level commission that makes economic

plans and launches them via its local government entities. "The FSDC will not be

in charge of carrying out detailed regulations, but rather will focus on risk

management and regulatory coordination of all the financial regulators," Lian

said.

     While the 19th National Congress of the Communist Party of China, which

opens on Oct. 18, will be watched mostly for the far-reaching changes expected

to be made in the government's top leadership, Lian said some important economic

decisions will be made or reiterated at the congress, guiding the direction of

China's economic reform for years to come. 

     "Regulations on the property sector will be further stressed, since it is

widely believed to be a risk for the economy," Lian said. "Discussion of reforms

will mainly focus on four areas: the under-discussed housing tax; regulation to

promote rental housing; effective management of land supply, particularly in

Tier-1 and Tier-2 cities, to curb rising house prices; and financial controls on

the sector, including household mortgages and loans to developers."

     In addition, the reform of state-owned enterprises, the coordination of

financial regulations, as well as fiscal and tax reform will be heavily

discussed during the congress, he said.

     YUAN TO MAINTAIN STRONG MOMENTUM; BONDS, NOT SO MUCH

     "The PBOC would like to see the yuan appreciate against the greenback, but

not a continuous sharp rise," Lian said, noting "the appreciation range will be

about 6%, and not exceed 7%," this year, which means the yuan's ceiling by the

end of the year would be 6.46, compared with the closing rate of 6.9495 at the

end of last year.

     The yuan has appreciated by 5.2% against the U.S. dollar so far this year,

peaking at 6.4350 on Sept. 8 at the end of a two-week strengthening run that

started Aug. 28.

     Lian said momentum for yuan appreciation will slow when companies and

speculators ease away from their current strategy of selling off U.S. dollars,

particularly when policy adjustments in the U.S. and the euro zone begin moving

in the same direction, which could cause depreciation pressures on the yuan once

again. [EDITOR'S NOTE: Lian made his comments prior to Thursday's policy

announcement by the U.S. Federal Reserve.]

     The outlook for China's bond market also does not seem promising, Lian

said.  

     "Over the next few months, the Chinese bond market will remain volatile, as

the liquidity situation will get tighter," Lian said. "Although financial

regulation is being pushing forward at a slower pace, its direction has not

changed, which means the PBOC could impose its tightening bias" whenever it

feels it is appropriate to do so, Lian said.

     "The yield on the U.S. 10-year treasury bond is approaching bottom as the

U.S economy is recovering and its monetary policy is tightening, so it is

difficult to say this external factor would have a positive effect on the

Chinese bond market," Lian said. 

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

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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