MNI INTERVIEW: Boost Liquidity To Private Firms: Ex-PBOC Offcl

--M2 Growth May Exceed 8.5% in 2018, Even Higher Next Year

--New Measures Supporting Private Firm Bond Funding Not Policy Easing

--Shadow Banking Should Develop Under PBOC Guidance

     BEIJING (MNI) - The People's Bank of China (PBOC) should be more innovative

in channeling liquidity to the real economy, including giving proper guidance to

shadow banking development, a major source of funding for the private sector, a

former official told MNI in an interview.

     "The ample liquidity and low-cost capital in the interbank market have not

flowed to the real economy," said Sheng Songcheng, a former head of the PBOC's

statistics and analysis department and now a counselor to the Shanghai

government.  

     According to Sheng, M2 money supply, having expanded 8.3% y/y in September,

remains tight, given GDP growth of 6.7% and inflation at 2.5%, with the former

official saying a money supply growth rate of more than 10% would be proper as

he predicted a pick up in M2 growth to 8.5% this year and higher next year.

     Sheng commented after the PBOC said late Monday that it is increasing

relending and rediscount quotas by CNY150 billion to meet funding demand from

private firms and set up supporting tools for corporate bond financing.

     The PBOC's new measures are timely in helping improve private sector

funding, particularly since markets have failed to fulfill the function, and 

recent turmoil reduced investor and business confidence, Sheng said.

     --NOT POLICY EASING

     He stressed that the PBOC's latest moves shouldn't be interpreted as a

deviation from the "neutral" policy stance, adding that the initial support

funds will work only as a guide to draw in participation from other sources of

capital.

     "The market's assessment of the private sector's credit risks will

hopefully turn towards being rational, so this decision of the PBOC may be more

of a signal than injecting large liquidity," Sheng said.

     For full impact, the PBOC should control the latest injection properly,

Sheng added.

     "The newly-added relending and rediscounted capital is for targeted

adjustment to optimize economic structure, and it will not flood the market, nor

does it mean that the PBOC will bail out risky private firms," Sheng said.

     --SHADOW BANKING

     Off-balance-sheet financing, which shrank dramatically through the

authorities' deleveraging campaign, should be kept at a manageable scale to keep

small companies' funding channels, Sheng said.

     The PBOC's latest so-called aggregate financing to the real economy (AFRE)

data suggested that the growth of lending has failed to offset the shrinkage of

off-balance-sheet activities, he said.

     Excessive curbs on shadow banking, tightness in financing environment and

deteriorating risk appetite of lenders led to many defaults in recent months,

Sheng said. Small companies have to rely on shadow banking as a major funding

source because banks apply strict loan approval processes, he said.

     While the deleveraging campaign has contributed to the low growth of M2

this year, and the impact has expanded to AFRE, GDP growth would remain

comparatively high at 6.5% for next year, Sheng said. 

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

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

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

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