MNI INTERVIEW 1:China Should Relax Deficit, Leverage Controls

--Investment Critical To Recovery

--Higher Leverage Ratios Necessary

--First Of 2-Part Interview With Tang Min, Advisor To State Council

     BEIJING (MNI) - China should allow its budget deficit to rise and ease

controls on borrowing helping to unleash an investment-driven effort to

kickstart an economy stalled by the coronavirus outbreak, a counsellor at the

State Council said in an interview with MNI.

     "The government may have not any choice but to act," given the epidemic,

together with the sluggish global economy and trade frictions with the U.S.,

said Tang Min, an economist at the official advisory body inside Premier Li

Keqiang's cabinet.

     The government's large asset holdings, including land, banks and

businesses, make it able to handle higher leverage than is the case in other

countries, he said. The dependence of Chinese companies on bank loans rather

than equity financing also means that leverage ratios tend to be higher than

elsewhere, Tang said on Tuesday.

     "Presently a major issue with private investment is that people lack

confidence," Tang said. Powering up fiscal and monetary policies would help to

remedy this and prompt companies to spend more, he said.

     Yet a new round of investment may not go to traditional infrastructure like

railways and highways, with which China is already well supplied, Tang said.

Instead the government may direct investment to public health and medical care,

whose inadequacies have been exposed in the current spending, as well as

education, culture, agricultural land and irrigation, he said. Investment in

these areas can be undertaken more quickly than in basic infrastructure, with up

to up to 70% of such social development spending potentially feeding into 2020

GDP figures, Tang said.

     High-tech investments could include 5G networks, electric vehicle charging

posts, high-speed internet. These, together with intercity rail connections,

could be joint efforts between the public and private sectors, Tang said.

     --LOW-INCOME SUBSIDIES

     Low-income social groups, both in urban and rural areas, should receive

subsidies to cope with rising food prices in the short term, said Tang, who

works on rural poverty reduction programs.

     "The fiscal deficit needs to increase under these circumstances; it should

not be constrained by 3%," Tang said, referring to the government's deficit

ceiling in terms of its ratio to GDP. The deficit ceiling will be determined by

National People's Congress, which had been scheduled for March but has been

postponed.

     Tang declined to provide any estimate for China's growth rate during 2020,

citing the many uncertainties regarding the outbreak, which is now expanding

faster outside China and could undermine demand for the country's exports.

     Tang cautioned that a return to normal levels of consumption may not take

place until after April, particularly in service sector areas such as

restaurants, cinema and tourism, given that consumers might still be hesitant to

go out. Industrial production may have an easier time recovering, so long as

there is demand, he said.

     While the unemployment rate may rise, and could potentially exceed the

government's previous 5.5% "redline" in one or two quarters, any increase is

likely to be contained given that employment is a policy priority for the

government, Tang said, noting that this was why the authorities are so keen on

assisting small- and medium-sized businesses. China has also had a shortage of

labour in the past few years, Tang added.

     Asked whether the outbreak could weaken China's dominance as a global

manufacturing centre, Tang said the real threat is trade frictions with the U.S.

and anti-globalism.

     "Global production chains are definitely being affected and some may

migrate," he said. But some transfer of manufacturing capacity abroad was

already occurring as China upgrades its economic model, Tang said.

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

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

--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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