MNI Exclusive: Deleveraging Goal Needs Targeted Enforcement

--More Targeted RRR Cuts Will Launch: Li

--Fiscal Policies Have Not Been Accommodating: Li

     BEIJING (MNI) - The People's Bank of China (PBOC) should further fine-tune

its monetary policies, including applying more targeted cuts of the reserve

requirement ratios, to meet the objectives of deleveraging and shepherding the

economy, Li Daokui, a former member of the central bank's Monetary Policy

Committee, told MNI.

     "The central bank should launch more targeted policies to loosen credit

properly and increase supply of financial resources, meanwhile encouraging banks

to participate in corporate bankruptcy and restructuring," Li, also a Tsinghua

University economist, said in an interview at the sideline of a financial forum

last week in Beijing.

     More official advisors and economists are recommending easing the tight

policy bias and slow the pace of deleveraging, as several indicators signaled

further deterioration in the economy due to the credit squeeze.

     The current slowdown is mainly due to the inaccuracy of policy-making in

conducting the deleveraging campaign, Li said during the forum, warning that the

dramatic declines in credit growth and lending from shadow banks due to the

tight financial regulations have significantly dragged down infrastructure

investment and raised refunding costs.

     --TARGETED POLICIES

     The biggest problem facing the Chinese economy now is that inefficient

firms have occupied about 10% the country's financial resources, or over CNY2

trillion in loans per year, while potential projects are lacking financing, Li

noted.

     "The willingness of relevant parties, including banks and local

governments, to participant in debt restructuring is very small, which is the

problem policies should deal with," Li noted. "If we keep the current pace, it

would take at least 5 years to restructure about the CNY6 trillion estimated

debts: It is too slow," he said.

     In addition, fiscal policies have shown a contracting bias, contra to the

requirement of proactive fiscal policy and prudent and neutral monetary policy,

Li warned.

     In the first five months of this year, fiscal revenue grew 12.2% from last

year, but spending growth declined to 8.14%, compared with 14.68% during the

same period last year.

     "According to our calculation, the fiscal deposit has grown CNY7 trillion

this year, the same amount that the previous targeted RRR cut unlocked, which

means the PBOC is injecting liquidity while Ministry of Finance is draining it,"

Li noted.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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