MNI EXCLUSIVE:PBOC May Slow Easing As Fiscal Stimulus Kicks in

     BEIJING (MNI) - The People's Bank of China is likely to slow its pace of

easing, pushing back any further cuts in banks' reserve requirement ratios,

thanks to better-than-expected first quarter growth data and as fiscal stimulus

supports the economy in the second quarter, government advisors told MNI.

     While advisors questioned whether the first quarter's GDP growth rate of

6.4% was sustainable, they said it should postpone further PBOC action for now,

particularly as fiscal policy moves begin to be felt.

     "Cuts in taxes and fees will take effect in Q2, so the quantitative

stimulus should be eased, " said Zhang Ping, deputy director at the National

Institute of Finance and Development, a state-level think tank, and a research

fellow at the Institute of Economics of the China Academy of Social Science.

     But he added that first quarter GDP had been boosted by strong net exports

and leverage, which could contribute to financial risks.

     "If Q2 data does not show positive signs from firms and households and

growth continues to rely on stimulus, then we could not talk of substantial

economic stability," he said.

     A clue to economic resilience could come from money supply data, he said,

noting that growth in the narrower M1 measure, which includes cash and current

account deposits, better reflects the performance of companies and households

than the broader M2, which also counts mutual funds and time deposits.

     --MONEY SUPPLY

     "If M1 growth exceeds M2, then we can say the economy has bottomed out,"

Zhang said. In March, M1 increased by 4.6% on annual basis, while M2 rose 8.6%,

PBOC data showed.

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

State Council's Development Research Center, said interbank liquidity remains

loose, with money market rates and bond yields relatively low following

consecutive RRR cuts at the end of 2018 and in early 2019.

     "Further easing is unnecessary at present," he said, adding that a

widely-expected additional cut in banks' reserve requirement ratio would not

materialise in Q2 at least, unless a surge in bank lending prompted the central

bank to give lenders further leeway.

     The PBOC has already trimmed the amount of liquidity it pumps into the

interbank market, suspending daily open-market operation for 18 sessions in a

row until this Tuesday, when it injected a relatively modest CNY40 billion. It

rolled over a CNY200 billion one-year medium-term lending facility and offered

CNY160 billion in 7-day reverse repos, but this fell short of the CNY366.5

billion in MLF maturities.

     Chen agreed that it was too early to say whether exports would remain

strong. Growth data may reflect the effects of credit expansion, fiscal stimulus

and a buoyant stock market, he said.

     The PBOC, retaining its neutral stance, is unlikely to cut its benchmark

lending rate, but could still try to reduce firms' financing costs via other

means, Chen said.

     Zuo Xiaolei, research fellow of the counsellors' office of the State

Council, told MNI that policymakers are still intent on stabilising economic

growth. But she said the central bank should moderate its easing and more

precisely target the flow of liquidity.

     "Growth in the money supply should match nominal GDP growth, or else

excessive liquidity will trigger speculation in sectors enjoying high returns,

such as the property market, instead of serving the real economy," Zuo warned.

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

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