MNI Insight: China Boosts 2019 Investment Due Econ Headwinds

--Annual CEWC Sets Tone For 2019 Economic Plan

--Special Local Government Bond Issue To Over CNY2 Trillion

--Monetary Policy Keeps Easing Bias To Boost Economy

--Yuan Faces Uncertainty On Trade Talk and Dollar Index

     BEIJING (MNI) - China will put weight on countercyclical measures,

including further prudent monetary policy easing and more proactive fiscal

policy, to boost domestic investment which is subject to the pressure of an

economic slowdown, MNI understands from officials and advisors.

     The Central Economic Work Conference (CEWC) in Beijing last week, a meeting

of top Chinese officials chaired by President Xi Jinping, acknowledged the

short-term difficulties with new wording hinting at the future policy stance to

offset the economic headwinds.

     A major driver of policy next year will be investment weakness, including

in infrastructure and manufacturing. The monetary authority will retain adequate

liquidity while there will be enhanced targeted credit support to small private

businesses and fiscal policy will provide a larger tax cut and increased

spending to strengthen infrastructure, sources told MNI.

     The emphasis on the development of high quality manufacturing and the

creation of a stronger domestic market is closely linked to the trade war,

suggesting that policymakers are trying to offset the impact of potentially

long-term external conflicts.

     --FISCAL POLICY

     A big boost to market confidence from the meeting was the confirmation of a

larger tax cut. 

     An advisor to the Ministry of Finance told MNI that the value-added tax

reduction would amount to more than CNY600 billion. The advisor also said that

the total tax cut next year will exceed the CNY1.3 trillion cut this year

     In addition, corporate income tax would focus on narrowing the tax base,

including technology investment, and maybe not on cutting tax rates, the advisor

said.

     The meeting advocated "a large scale" increase in the issuance of special

local government bonds. The advisor said it meant that the issue quota would be

over CNY2 trillion, even close to CNY3 trillion, compared with CNY1.35 trillion

this year.

     Since these special bonds are not incorporated into the fiscal deficit, the

deficit rate would not see a big rise next year, the advisor said, adding the

rate would be set in a range of 2.6% to 3%.

     --ARDUOUS SITUATION

     According to the conference, the economy has experienced some adverse

changes and the external environment is complicated and challenging.

     The wording affirmed a comparative loosening bias for the whole of macro

policy, an advisor to National Development and Reform Commission said.

     As the meeting stressed that 2019 would "lay a decisive foundation for

building a moderately prosperous society in all respects," the growth target

above 6.2% should be reached next year, the advisor said.

     The meeting emphasized the "huge potential of investment demand"  since

exports will be constrained by the trade war and consumption would soften due to

sluggish income growth.

     Infrastructure investment in key sectors for improving weak links, such as

tech upgrade in manufacturing, 5G, AI and so on, will be further boosted.

     --MONETARY POLICY

     The expression on monetary policy did not use the word "neutral". A source

close to the central bank said that the PBOC would retain an easing bias like in

2018, explaining that the interbank market needs ample liquidity to handle the

increased issuance of special local government bonds.

     The focus of monetary policy next year will be on credit expansion. To

ensure that small private business get access to the ample liquidity more

targeted measures would be seen, the source said.

     With the targeted moves to support the real economy, the need to cut the

benchmark lending rate would be not very urgent, the source said.

     Unexpectedly, the meeting's conclusions did not mention the yuan exchange

rate.

     In both 2016 and 2017 the exchange goal was cited as keeping the yuan "at a

reasonable and balanced level".

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

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: MAQDS$,MMQPB$,M$A$$$,M$Q$$$,MX$$$$,MGQ$$$]