MNI INTERVIEW-1: Need Flexible Yuan On Global Pol Moves: Huang

--No Need Now To Add Policy Stimulus: Ex-PBOC MPC member Huang Yiping 

     BEIJING (MNI) - China should increase the yuan's flexibility to better

cushion against the shifting policy stances of major central banks, Huang

Yiping, a former member of the Monetary Policy Committee at the People's Bank of

China, told MNI in an interview, although he admitted their current dovishness

would allow additional room for the PBOC to ease policy if needed.

     "Markets expect that the Fed may cut rates twice this year. If so, it would

relax pressure on the yuan and monetary policy of the PBOC, which would be good

news in the short term," said Huang, now deputy dean of the National School of

Development at Peking University.

     Huang also noted yuan flexibility would help if global central bank polices

turned less accommodative, pointing to currency problems faced by the likes of

Turkey in recent years as many leading economies floated the normalisation of

QE, problems from which China should take lessons.

     --REFORM FOCUS

     Given continuing uncertainty over the trade talks and the softness of the

global economy, counter-cyclical moves will still be needed, albeit carefully

controlled, Huang said.

     "The economy may still face downward pressure in H2 if growth stabilization

in Q1 was achieved by property and infrastructure investment, as the growth

would be unsustainable," he said, "We should pay more attention to employment

indicators, not GDP growth, as the government repeatedly said."

     Huang noted policy focus should be on improving efficiency via reform and

pushing the upgrading of industry. He cautioned against rushing towards stimulus

as soon as there are signs of a downturn, saying policymakers should tolerate a

moderate slowdown at a moderate pace, keeping their policy focus.

     "I do not think there is a great necessity for a strong stimulus at

present," he said.

     Last year's economic headwinds resulted largely from the dual effects of a

long-term slowdown trend and the impact of short-term policies, including

deleveraging and the environmental protection campaign, Huang said.

     --POLICY EFFICIENCY

     Huang also pointed to the diminishing efficiency of macro policy, noting

the increase in the Incremental Capital-output ratio (ICOR), a gauge of capital

usage efficiency. According to Huang, ICOR recorded 6.3 in 2016 in China,

compared with 3.5 in 2007 -- the higher the index, the lower the productivity of

capital or the marginal efficiency of capital.

     "The rise of the ICOR largely indicates that credit and investment

expansion is producing less economic growth," Huang said, which will jeopardize

long-term growth, he said.

     Supply-side structural reform of the financial sector, as directed by

President Xi Jinping, is urgent and necessary, Huang noted. As increased

stimulus in Q1 has triggered a rebound in leverage ratios, the low efficiency of

the sector heightens leverage risk, particularly when the leverage ratio has

built up rapidly on an already high base, he said.

     Concerned over rising risks as asset bubbles build, Huang warned that high

leverage and low efficiency could drag the country into a situation similar to

Japan's "lost decade".

     Huang thinks it unlikely China will experience a 'Minsky Moment', a sudden,

collapse of asset values after a long period of bullishness. Although the

leverage ratio is high, most debt is owned by either state-owned companies or

local governments, both of which are backed by China's state credit, he said.

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

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