MNI INSIGHT: China Stimulus May Have Limited Impact: Advisors

--Policy Options May Not Deliver Hoped For Outcome As Economy Slows

     BEIJING (MNI) - Concerns are growing among Chinese government advisors that

efforts to support the economy will fail to deliver the desired results, amid

policy constraints and depressed confidence, MNI understands.

     There is consensus among MNI contacts that China's economy will encounter

strong headwinds in 2019, with GDP growth seen in a range of 6.2%-6.3%, down

from an expected 6.5% in 2018, and perhaps falling as low as 6% if the trade

dispute further weighs on external demand.

     Responding to the slowdown already taking place, the People's Bank of China

has expanded credit to fuel private funding, whilst easing monetary policy from

its previous tightening bias. Fiscal authorities are also mulling more tax cuts

and increased spending.

     But further PBOC action may not have much effect, and additional fiscal

stimulus could be relatively small, advisors said, although they added that such

measures, together with correcting the excesses of the government's previous

deleveraging campaign, might still boost confidence even if their direct impact

on the economy was limited.

     --PBOC STRUGGLING

     The central bank has plenty of tools it can tap, including cutting

benchmark interest and money market rates, trimming banks' reserve requirement

ratios and expanding credit.

     But lower interest rates would hurt banks, already struggling under

tightened regulation, as their profits from mortgage loans would shrink. It

would also likely trigger property price rises, going against the thrust of the

government's de-risking campaign.

     A money market rate cut, via the Medium-term Lending Facility, would also

further narrow the interest rate spread between China and the U.S, potentially

pressuring the yuan and triggering capital outflows.

     An RRR reduction remains the most likely option next year, advisors agree,

although four such cuts in 2018 failed to fuel credit provision. A direct

campaign to boost lending to the private sector is seen as unwise by advisors,

as it would boost the leverage of small companies and increase their exposure to

a downturn.

     --LIMTED OPTIONS

     At the same time as monetary tools face constraints, the central government

is also unwilling to significantly raise its fiscal deficit, advisors said, so

the room for substantial tax cuts and additional spending is limited.

     The main option for fiscal stimulus remains a cut in value-added tax,

although this would likely boost individual sectors and have little impact on

boosting consumption overall.

     Even a corporate tax cut could provide minimal impetus, with low confidence

levels at many firms likely to constrain investment.

     Financial markets are expecting large scale infrastructure investment to

offset any negative impacts if exports slow, but advisors are less optimistic.

Local governments are struggling under huge debt levels and there is little

appetite for further risk exposure.

     Without a pick-up in fiscal spending, there appear few other channels from

which to source investment funds, especially as increased financial regulation

has blocked many channels for public-private partnership.

     One solution could be to relax restrictions on the property market, as the

country has counted on the sector to underpin the economic miracle over the last

decade. But a big question mark is whether the household sector could carry

increased leverage, as disposable income growth has dipped as the economy slows.

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

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

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