MNI INTERVIEW: China Can Grow 5%+ For Years: ex-Fin Min Offc'l

     BEIJING (MNI) - There is still significant room for China to boost

investment in industry and urban development, which could help it grow at more

than 5% a year for the next decade, but the country must deal with the

middle-income trap, a former head of research at China's finance ministry told

MNI in an interview, calling for current economic stimulus plans to focus on the

private sector.

     Chinese GDP growth should be above 5% or approaching 6% for the ten years

after 2020, despite the prospect of a protracted trade dispute with the U.S., so

long as productive investment remains at sufficiently high levels, said Jia

Kang, now head of the China Academy of New Supply-side Economics, on the

sidelines of the 2019 Moganshan Forum.

     "Fixed-asset investment should be growing at 6% for now, compared with the

current 5.5% and last year's 5.9%," Jia argued, adding that

infrastructure-backed "special bonds" issued by local governments would have an

effective role in boosting investment, as 20% of the funds they raise can

contribute to project capital.

     Authorities should also continue to foster the use of Public-Private

Partnership projects, in which private partners assume a significant share of

the risk, the 30-year finance ministry veteran said, commenting on reports that

large numbers of them have been called off as a result of moves to contain local

governments' leverage.

     --MIDDLE-INCOME TRAP

     After 2020, China's key challenge will be overcoming the middle-income

trap, he said, noting the key role of fiscal policy in encouraging the

development of the most promising economic sectors.

     "The challenge is quite obvious with all kinds of conflicts from both

domestic and external sides," he warned, "If we could not cope with some

difficulties properly, it would be hard to maintain the growth rate that is

needed to become a high-income country."

     GDP growth in both 2019 and 2020 would likely remain above 6%, although it

could decline slightly in the second half of this year from H1's 6.3%, Jia

predicted. Softening government revenues and stimulus spending will make fiscal

targets harder to achieve, he noted.

     "Whether the budget plan can be completed in line with the targeted 2.8%

deficit ratio in the rest of the year needs to be monitored," Jia said, adding

that he considered the target "a bit cautious."

     "Even if the ratio exceeds 3%, there would be no big impact. But policy

makers always want to control the ratio to leave policy room for the future and

prevent risks."

     Policy makers also have the means to address problems of excessive

leverage, such as that of local governments' implicit liabilities, Jia said.

Regional banks' balance sheets could be cleansed of bad assets, he said,

although the risk remains of local liquidity crises, which could unnerve

markets.

     The People's Bank of China should also continue to provide ample liquidity,

by cutting banks' reserve requirement ratios, he said, although it should be

careful using targeted measures which would not solve structural problems.

     A rate cut would be beneficial, said Jia, although he noted that high debt

levels are still a constraint on monetary easing, despite the government's shift

from a call for "deleveraging" to one for "stabilising leverage." Rising

inflation, fueled by rising pork and vegetable prices, will also be a

restraining factor for the PBOC in the short term, he added.

     --UPGRADE

     China will have to upgrade its economy despite U.S. measures which make it

more difficult for it to develop its high-tech industries, and increased

competition from south-east Asia in lower added-value manufacturing, Jia said,

noting that recent economic indicators, market sentiment and investor confidence

all show the damping effect of the trade dispute with Washington.

     "The U.S is unlikely to remove all the additional tariffs it has imposed on

Chinese imports since this is a function of U.S. interests," Jia noted,

"Restricting and suppressing China is the U.S.'s real objective, so we have to

prepare for a protracted dispute."

     Authorities should gradually loosen their tight grip on the capital

account, particularly as they set up more free trade zones, and allow a more

flexible exchange rate now that the yuan has passed the key level of 7 to the

dollar, the economist said.

     "We should allow the market to play a bigger role [in setting the exchange

rate] if necessary, as it helps relax the pressure of exports," he said.

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

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