MNI INTERVIEW: China Economy To Stabilise In Q2, Advisor Says

--PBOC May Have Greater RRR Cut Opportunity In Months Ahead: Zhang

--Bearish Sentiment Could Push Yuan To 6.9 vs Dollar

     BEIJING (MNI) - China's economy should stabilise this quarter, buoyed by

fiscal stimulus, but the central bank still has room to cut lenders' reserve

ratio requirement if necessary, a senior government advisor told MNI.

     Reductions to taxes and fees, together with an RRR cut earlier in the year,

should add between 0.4 and 0.5 percentage point to GDP growth in the second half

of the year, pushing the full-year rate of expansion to 6.3%, said Zhang Pin,

deputy director at the National Institute of Finance and Development, a

state-level think tank.

     In addition they could help keep growth above 6% in 2020, furthering the

policy target of doubling China's GDP in the ten years from 2010, noted Zhang,

also a research fellow at the Institute of Economics of China Academy of Social

Science.

     But bearish sentiment could push the yuan lower to 6.9 against the dollar

by year-end, Zhang said, adding that China has no need of a strong currency

given continuous capital outflows.

     --RRR CUT

     Although the U.S. Federal Reserve has turned more dovish, taking some

pressure off rate differentials, the People's Bank of China should still look at

cutting the RRR before adjusting benchmark rates, Zhang said.

     A rate cut could trigger asset price volatility, but, with many companies

still facing financing difficulties, an RRR cut would help lenders feed loans to

the real economy, he said.

     An RRR cut could also boost the money supply, with Zhang predicting M2

growth staying above 8% this year, with consumer price inflation around 1.8%.

     For Zhang, the latest stimulus package is "balanced" as it cuts taxes and

fees but boosts fiscal spending whilst keeping a lid on growth in both the

fiscal deficit and debt.

     Employing as much as CNY30 trillion in residual funds currently unused in

the fiscal system could partially offset the effect of lowering taxes and fees,

he said.

     Zhang called for increased use of macroprudential measures alongside

monetary policy, to ensure financial intermediaries are able to withstand

economic shocks. Bank recapitalization is key to reducing risk, he said, adding

that it could drive the next leg of a bull market in stocks.

     The economy faces significant challenges this year, he said. The likelihood

of falling producer prices could weigh on profits and push up real interest

rates, although there is potential upside as some companies will be able to

obtain cheaper supplies. This raises the dilemma for policymakers of deciding

whether to focus monetary policy on boosting prices or to continue to stress

structural deleveraging.

     The need to stabilize asset prices, which suffered volatility in 2018 due

in part to deleveraging, will also be key, Zhang said.

--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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