MNI EXCLUSIVE:China Advisors Torn Over Stimulus As Growth Dips

     BEIJING (MNI) - China's slowest growth in three decades has divided

government advisors over how to stimulate the economy, amid concerns that rising

inflation cramps the space for additional monetary easing just as the scope for

boosting infrastructure spending is limited by local governments' lack of access

to capital.

     The People's Bank of China may opt to make further small cuts along the

lines of early November's 5-bps reduction in its medium-term lending facility

rate, helping to guide down the Loan Prime Rate which acts as a reference for

corporate bank loans, Xu Qiyuan, director of the Economic Development Division

at the Institute of World Economics and Politics under the China Academy of

Social Sciences, told MNI. More aggressive easing, such as a further reduction

in banks' reserve requirement ratios, might fuel excessive inflationary

expectations, he added.

     "Even a 0.25% RRR cut would release several hundred billion yuan in

liquidity," he said, noting that monetary policy's usefulness is reduced by weak

loan demand.

     The People's Bank of China reduced its 7-Day Reverse Repo rate by 5bp to

2.50% on Monday, following its Nov. 5 MLF cut to 3.25% from 3.3%.

     Even though the recent spike in inflation has been driven by an outbreak of

African Swine Fever which has devastated herds and sent pork prices spiralling,

the central bank must ensure it contains further upward momentum, the advisors

said.

     Inflation hit an eight-year high 3.8% in October, well above the

government's targeted 3% ceiling, and market expectations are for a rise to over

4%, or even to as high as 5%, with the arrival of Chinese New Year. GDP growth

sank to 6.2% from Q1 to Q3.

     Inflation may only cool from the middle of 2020, making a benchmark lending

rate cut unlikely before then, Xu said.

     --FISCAL POLICY

     Wu Ge, a former official at the PBOC's monetary policy division, agreed

that a reduction in the one-year benchmark rate is unlikely at current levels of

inflation, and given the danger of fuelling further house price speculation.

Instead, he called for more expansionary fiscal policy, and for increased bond

issuance to support infrastructure investment.

     But most infrastructure spending is channelled through local governments,

which are already heavily indebted and whose financing vehicles are facing

difficulty rolling over debts.

     Further increases in infrastructure spending may have to be backed by

central bank support, said Zhang Ping, Deputy Director of National Institution

of Finance and Development.

     "While fiscal policy can produce immediate effects on the economy, it needs

to be supported by proportionate monetary policy," Zhang said.

     This year's quotas for both the government's fiscal deficit and for

issuance of local government special-purpose bonds, used to fund infrastructure,

have been reached already. Such expansionary measures are "unprecedented",

according to Zhang, who said it was "inevitable" the government would increase

its fiscal deficit target for 2020.

     Dong Ximiao, a National Institution of Finance and Development researcher,

said three Federal Reserve rate cuts have made some room for China to ease

monetary policy, but that there is not much room to do so.

     "I rather suggest that monetary policy should stay relatively stable," Dong

said, "it needs to play a more important role in preventing risk."

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

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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