MNI EXCLUSIVE:More China RRR Cuts Seen, But Not As Much As '18

--The PBOC Could Cut RRRs Two To Three Times This Year, BCM Economist Says

--More Cuts Would Risk Capital Outflows, Yuan Weakness

     BEIJING(MNI) - The People's Bank of China will probably make two to three

cuts in banks' reserve requirement ratios this year, but the total reduction

will be smaller than that of the four announced in 2018 in order to avoid

putting pressure on the yuan and triggering capital outflows, Lian Ping, chief

economist at state-owned Bank of Communication, told MNI.

     "We could expect two to three RRR cuts this year," said Lian, who often

participates in advisory meetings with key policy makers. He spoke to MNI on the

sidelines of the bank's 2019 Economic and Financial Outlook briefing on Friday,

shortly before the PBOC announced a 100-basis-point RRR cut, divided between two

equal reductions on Jan. 15 and Jan. 25.

     "The target of loosening monetary policy has basically been reached after

the PBOC cut RRR four times last year," Lian said. "The key issue now is how to

guide unlocked liquidity towards companies and stabilise low levels of lending

rates."

     Here are key points from the briefing

     --Further significant monetary policy easing is unlikely this year, as it

could cause additional widening in the yield gap between Chinese and U.S.

government bonds, prompting yuan outflows. Policy moves will target specific

sectors seen as requiring a greater flow of credit, including via regulatory

changes. The PBOC will conduct targeted RRR cuts, which should facilitate the

repayment of maturing medium-term lending facilities, and use monetary policy

tools to provide liquidity.

     --While market expectations are for a yuan recovery before the second

quarter, depreciation pressure will persist over the year due to the slowing

economy, the moderate further loosening of monetary policy and a likely current

account deficit. But the chances of the yuan falling through the key level of 7

to the dollar are now small, as the prospect for further Federal Reserve

interest rate hikes fades and given the possibility of a positive result from

trade talks with the U.S., Lian said.

     --With soft domestic and external demand, GDP growth should be 6.3% in

2019, Lian said, noting that full-year growth for 2018 should come in at 6.6%.

This year's growth could be 6.5% if trade talks with the U.S. are successful, he

said. Infrastructure investment, set to grow by 10%, should be a major support

for the economy, but exports will be a drag, with their annual rate of growth

slipping to about 5%. Growth in imports should ease to 10%. The trade surplus

could narrow to USD300 billion and the current account move into deficit.

     --Moves to bolster credit expansion will gain purchase as the central bank

takes regulatory and other measures to channel lending to small and micro-sized

companies. Credit should grow by 13.5% to 14% in 2019, and the M2 measure of

broad money should increase by 8.5% to 10%. As liquidity remains ample, the

benchmark 7-day reverse repo rate could be volatile, with 2.5% as its mid-point.

     --Inflation will remain low despite additional moderate easing, as oil and

commodities prices fall, and domestic demand from investment and consumption

remains weak. Consumer price inflation should be around 1.8%, while producer

prices might only rise by 1%, with some months seeing falls.

     --Proactive fiscal policy will focus on tax cuts and issuance of special

bonds by local governments, which fund infrastructure spending but are not

included in headline central government fiscal calculations. Special bond

issuance could rise to about CNY2 trillion, from CNY1.35 trillion in 2018, while

tax cuts could amount to CNY1.5 trillion over the whole year.

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

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

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