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MNI China Interview: BOCOM's Lian Sees Economic Headwinds

--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.
     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. 
     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
     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.
     "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
     "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:
--MNI Beijing Bureau; +86 (10) 8532-5998; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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