MNI EXCLUSIVE: China Advisors Want M2 Growth To Boost Economy

     BEIJING (MNI) - Economists at state-run Chinese thinktanks have told MNI

authorities should target a higher rate of growth in the M2 measure of broad

money to cushion a slowing economy from the impact of the trade war with the

U.S.

     M2 includes cash and bank deposits as well as liquid assets such as money

market funds. It generally tracks bank loans fairly closely, but in recent years

its growth has lagged due to a government deleveraging campaign and the transfer

of deposits from banks to fast-growing wealth management and fintech products.

     The rate of expansion in M2 should be boosted to 9.5%, from the record low

of 8% in October and November, said Xu Hongcai, deputy chief economist of China

Center for International Economic Exchange, which is managed by the National

Development and Reform Commission.

     Xu suggested additional cuts in banks' reserve requirement ratios in an

interview with MNI. Zhang Yongjun, also a deputy chief economist of CCIEE, said

the People's Bank of China might have to make more than three additional

50-basis-point RRR cuts, following the four this year.

     The PBOC has already signalled its intention to further ease monetary

policy, and on Wednesday announced a targeted medium-term lending facility, to

fund loans by large banks to small and private enterprises.

     --POLICY DEBATE

     The central bank's move came amid a policy debate between officials keen

for more monetary stimulus, and others who fear the dangers of backtracking on

the campaign to lower dangerously high levels of leverage, particularly among

state-owned enterprises and regional governments, which have built up since the

global financial crisis.

     Liu Yuanchun, a special advisor to the State Council and deputy principal

of Renmin University, said authorities should focus on the ratio of M2 to

nominal GDP, although he told a meeting on macroeconomic analysis last weekend

that RRR cuts might not be the best way to achieve this.

     "We should not overly use targeted loosening policies," Liu said.

     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 the central bank is not likely to further cut reserve requirements without

sterilization. A speech by PBOC Governor Yi Gang last week saying China needed

moderately loose monetary policy was likely to refer to moves to stimulate bank

lending, he said, noting that while interest rates are already low, they are not

helping corporate borrowers, with the yield spread between one-year AA- debt and

government bonds more than doubling since mid-2017 to 350 basis points.

     "Monetary liquidity actually is very loose now, but credit is very tight,

so we need to smooth the transmission system between monetary policy and

credit," Xu added. The central bank's recent unprecedented 36-day pause in open

market operations suggests it is aware that liquidity is abundant but is not

making it to the real economy, he said.

     Zhu Baoliang, chief economist at the forecast department of the State

Information Center, also noted limited room for further monetary policy easing.

     "I believe in the short term there's a chance of loosening monetary policy

to some extent, but the chance is not big," Zhu said, referring to market gauges

already indicating easy money, including the narrowing spread between China's

three-month SHIBOR interbank rate and three-month dollar LIBOR.

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

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

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