MNI EXCLUSIVE: PBOC Has Greater Leeway For Rate Cuts: Advisors

     BEIJING (MNI) - The recent dovish policy action by certain central banks,

including the U.S. Federal Reserve, along with increased flexibility in the yuan

forex level, has given the People's Bank of China (PBOC) greater scope to cut

interest rates, but the decision must be taken with great care, with due

consideration to the domestic economy and the outstanding challenges from trade

disputes, former advisors to the central bank have told MNI.

     An increasingly flexible forex policy and an external environment conducive

to a rate cut makes it easier for the PBOC to act now, Huang Yiping, a former

member of the central bank's monetary policy committee, told MNI on the

sidelines of the China Finance 40 Yichun Forum.

     "The countercyclical measures may be strengthened if the trade tension puts

fresh pressure on the economy," said Huang, now a senior fellow of the CF40, an

influential think tank.

     Expectations for PBOC rate cuts are growing after other central banks

followed the Fed in cutting rates, particularly with U.S. rates now expected to

be cut rate at least once more this year.

     Yu Yongding, another former MPC member, agreed that the PBOC needs to cut

rates to revive the flagging economy, but stressed that timing is crucial.

     Not all saw just benefits from a PBOC cut. Zhang Chenghui, former director

of the Financial Research Institute at the Development Research Center of

China's State Council, told MNI that cutting rates would put increased pressure

on the yuan, while the impact of cuts on boosting lending demand remains

questionable. He also thought the PBOC following the move to easing would just

fuel market sentiment over further global easing,

     The PBOC's quarterly report released last week stressed it will prioritize

domestic conditions in setting policy, although consideration would be given to

external factors, with a whole range of policy tools available for an extended

period if needed.

     --CURRENCY WAR

     All the economists agreed that China should not proactively seek to spread

the trade war into the financial sector, even as the U.S labels Beijing currency

manipulators.

     Certainly Beijing should not withdraw from the U.S.-dominated capital

markets, Yu said, warning that China needs to be well prepared for any fall out

from a financial war, including disruption in the domestic financial sector,

large-scale capital outflows and sanctions imposed on China's companies

overseas.

     Yu also warned that China should think carefully before weaponizing its

U.S. Treasury holdings as such a move could be self-harming. Instead, China

should look to gradually diversify its forex reserve investments, he said,

     Huang also noted that China should not let the trade war expand into the

financial sector with a large-scale devaluation of its currency, a move that

wouldn't benefit growth as the financial sector plays a bigger role for China's

economy with a wider capital account. A currency depreciation could accelerate

capital outflow and harm the economy, he added.

     The economists also agreed that China should accelerate moves towards yuan

internationalization, with Huang suggesting Beijing further open-up the economy,

including bringing in new trading partners, to help counter the trade war

impact.

     The yuan internationalization should be given emphasis ahead of the the

IMF's review of the Special Drawing Rights (SDR) next year, a review held every

five years, he added.

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

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

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