MNI EXCLUSIVE: Rate Cut Now Not In China's Interest: Advisors

By Wanxia Lin

     BEIJING (MNI) - China should not follow the U.S. Federal Reserve and reduce

interest rates for the moment, although a gathering slowdown might make a cut

necessary in coming months, government advisors told MNI.

     The Fed's quarter-point move was a "hawkish rate cut" and has increased

uncertainty, said Xu Qiyuan, director of the Economic Development Division at

the Institute of World Economics and Politics under the China Academy of Social

Sciences.

     The dollar strengthened against the yuan following the Fed's action, he

noted.

     "The best timing for cutting the benchmark deposit and lending rates would

be when inflation is significantly lower," said Xu, adding that a cut could come

next year. "In terms of external conditions, we would want to see a weaker

dollar index and stabilisation of the yuan."

     --MLF EASING

     Any additional easing this year, possibly in November, is likely to come

via lowering the medium-term lending facility (MLF) rate, so as to guide the

loan prime rate (LPR) lower and ease corporate borrowing costs, Xu said. The

deposit rate would remain stable, he added. The LPR is the reference rate for

new bank loans.

     Niu Li, deputy director of the Economic Forecasting Department at the State

Information Center, an advisory group under the National Development and Reform

Commission, agreed that a rate cut is possible if Beijing's growth target comes

under threat.

     Weak industrial production and fixed-asset investment data in August have

led some analysts to reduce growth forecasts, but Niu is optimistic about

hitting the target, predicting expansion of 6.2% this year. While Q3 could see a

slowdown to 6.1% on sluggish factory output, activity should pick up in Q4,

thanks to base effects, recent policy easing and special-bond-financed

infrastructure investment.

     --INFLATION

     Both advisors believe that headline CPI, driven higher mainly by pork

prices, should be no constraint on any further easing unless it rises further.

Even though CPI hit 2.8% y/y in August, Niu pointed out that year-to-date CPI

sat at 2.4%, well within the annual 3% ceiling set by the government.

     Xu believes falling core CPI (1.5% y/y in Aug) and PPI (-0.8% y/y in Aug)

may argue for a rate cut, although the effects of African swine fever could push

headline CPI above 3% in December, and above 4% during Chinese New Year.

     "If the China-U.S. trade talks goes well, pork imports could be boosted by

two to three million tones," said Xu, "but that won't cover a shortfall of over

ten million tones."

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

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

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