MNI EXCLUSIVE: China To Refrain From Major Additional Stimulus

--Authorities May Save Bullets for 2020, Govt Advisors Tell MNI

     BEIJING (MNI) - China will refrain from significant additional stimulus in

the second half of 2019, to save fiscal and monetary ammunition for what may be

an even tougher year in 2020, but authorities will allow companies to accelerate

borrowing to counter the economic headwinds, government policy advisors told

MNI.

     Already-announced stimulus measures should be sufficient to keep growth in

gross domestic product within its targeted range, the advisors said, adding that

when the deliberations of the quarterly politburo meeting are revealed at the

end of the month, they are unlikely to deviate much from previous commitments to

stabilise the economy.

     The authorities will continue efforts of reaching balance between

stabilizing economy and preventing financial risks, which means the regulation

on some key sectors, such as property market and local government debt raising

behaviours, would not be shifted, advisors said.

     The advisors stressed that their forecasts of policy caution were based on

the assumption that China's trade dispute with the U.S. will not get worse. Any

failure of talks to prompt the removal of a 25% U.S. tariff on $200 billion in

Chinese goods, which came into effect on June 1, would be a serious blow to the

economy and exporters' confidence, said one advisor to the central government.

     But, for the meantime, officials are likely to opt for caution.

     "The focus of policy will be on flexibility at a time when the (trade)

talks are still going on, and aim to ensure previous measures are enacted,

particularly the fiscal measures," the advisor, who asked to remain anonymous,

told MNI, "More measures will be needed next year."

     --GDP ON TRACK

     Although the economic slowdown presents a significant challenge, GDP growth

should reach 6.2% to 6.3% thanks to previous fiscal measures and liquidity

injections. While some policy fine tuning or moves targeting specific economic

sectors are possible, there is little urgent need for a bigger fiscal stimulus

or monetary easing, the advisor said.

     Fiscal and monetary policy also face constraints from a budget deficit

already swollen by tax cuts and increased spending, and from signs that

increased liquidity provision did more to fuel speculation than to boost

long-term lending to the real economy.

     A second advisor said the central bank would continue to make targeted cuts

in banks' reserve requirement ratios and employ other monetary tools, to help

small banks deal with liquidity issues. But the People's Bank of China is

unlikely to follow the lead of the Federal Reserve in cutting its interest

rates, at least in the third quarter, as money market rates are already low.

     --BENCHMARK CUT UNLIKLEY

     A reduction in the benchmark lending rate is even less likely, given that

PBOC Governor Yi Gang has said he wants to phase it out, and lowering it would

not help reduce companies' funding costs, the advisor said.

     Fiscal policy has made the biggest contribution to supporting growth this

year, the advisor said, referring to CNY2 trillion in tax and fee cuts and the

front-loading of issuance of infrastructure-backed local government "special

bonds".

     "We need some time to see the impact of these policies," the advisor said,

noting that recent measures to allow local governments to use proceeds from

special bond issuance as capital for some infrastructure investments should also

provide some impetus.

     "We will see if that attracts more private investment, and will evaluate

the effects of current policies before taking more action," he said.

     Neither advisor saw much chance of the authorities allowing any expansion

of the fiscal deficit, with one saying that markets might be unnerved were it to

exceed 3% of GDP. The government is targeting 2.8% of GDP for 2019.

     Leverage within the economy is set to rise, adding to a surge in the first

quarter, as companies are permitted to borrow more. This retreat from the

country's two-year deleveraging campaign was necessary given the extent of the

slowdown, the second advisor said.

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

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

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

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