MNI EXCLUSIVE: China Tolerating Lower Growth, Advisors Say

     BEIJING(MNI) - A commitment by China's Politburo to concentrate on

supply-side reform and promoting infrastructure development may indicate an

increasing official tolerance for lower economic growth as well as concerns over

the risks arising from excessive leverage, policy advisors told MNI.

     Given that the rate of expansion of gross domestic product remains towards

the lower end of its target range, monetary policy is likely to retain its

neutral-tilting neutral stance and any additional fiscal measures will probably

target support of the infrastructure sector, said Yu Yongding, a former member

of the PBOC's monetary policy committee.

     The Politburo said on Tuesday that officials will explore means of boosting

consumption and incentivising the development of rural markets, while seeking to

stabilise investment in manufacturing and in "new-type" infrastructure involving

urbanisation and information networks. While the policy tone did not vary

substantially from that of the Central Economic Work Conference in December,

advisors noted the emphasis on carefully targeting investment and the stress on

preventing fallout from a build-up of debt in different economic sectors.

     The central bank will hold to the principle of "neither too loose nor too

tight," while acting to ensure ample liquidity as necessary, Xu Hongcai, deputy

director of the Economic Policy Commission of the China Association of Policy

Science, a state think tank, told MNI.

     "Growth in M2 could rise further to 9%, which is an appropriate level, but

the space for lowering market rates now is limited as we have to take the yuan

exchange rate into consideration," he said,

     "Structural problems should be the focus, in order to smooth policy

transmission."

     Small firms continue to face funding difficulties, Xu said, mentioning as

an example the export-dominated businesses in the Wenzhou and Guangzhou regions.

The comprehensive private lending rate in Wenzhou has averaged 17.14% so far

this year, up from 16.17% over all of 2018, according to Wind Information.

     The PBOC could respond with further cuts to banks' reserve requirement

ratios, he said, arguing that alternative moves, such as relying on medium-term

lending facilities, could actually push up banks' funding costs, exerting

further pressure on long-term lending to the real economy.

     Chen Daofu, deputy director of the Research Institute of Finance with the

State Council's Development Research Center, told MNI that the authorities

appeared to feel little urgency with regards to further fiscal stimulus, but

that concerns about financial risk remain, and that inflation running at 2.7%,

close to the 3% target, may reduce the chances of monetary easing. While the

Politburo statement made no mention of deleveraging, it did speak about winding

down so-called "zombie companies" and cracking down on property speculation.

     Regulators will be cautious in responding to problems in small banks, after

Baoshang Bank and Jinzhou Bank both had to be rescued, Chen said, noting

references by the Politburo to dealing with risks in a measured and controlled

way.

     Supply-side reforms will also aim to upgrade industry supply chains and

basic capacity, Chen predicted.

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

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