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CPI Inflation Rises By 5% In July


German GDP Rebounded in Q2, But Lower Than Expected

--Deficit Ratio Should Be Raised To Boost Economy: Zhang
--Central Govt Should Bailout Outstanding Local Govt Debt
--Yuan Should Be Given Greater Flexibility To Fluctuate
     BEIJING (MNI) - China's government shouldn't back away from market
orientated reform even as the nation continues to suffer the growing pains of
economic transition, a former senior advisor of the central government told MNI.
     "It is a crucial time for the economic transition, which will be painful as
the process will drag down economic growth and highlight social problems, but
the market-oriented stance should not be changed," Zhang Chenghui, former
director of the Finance Research Institute at the Development Research Center of
the State Council told MNI in an interview.
     Zhang's comment come as a growing number of economists and advisers are
calling for change, as they see a need for the world's second largest economy to
divert from its state-directed model, one of Washington's major grievances in
the current dispute.
     Policymakers should not stick to some rigid standards and at times of
increased economic strain, special measures should be taken as needed, Zhang
     One topic that has divided policymakers and academics recently is whether
China should increase its fiscal deficit above 3%.
     According to Zhang, the government faces a dilemma, requiring the
efficiency of the market economy but wanting the control capacity of a planed
economy, although she understands the difficulty finding balance between
efficiency and stability.
     "In the current situation, the 3% of GDP deficit ratio is not appropriate
to boost the economy. We should raise the level and then let it fall at a
gradual pace after the difficult time," Zhang suggested.
     She warned the actual deficit ratio has probably already passed that level
in practice, considering the huge fiscal spending and high leverage of local
     Irrespective of the government's decision on deficit spending, the biggest
driver of the economy ahead, will still be consumption, but the distribution of
national income between government and individuals must be correct, Zhang said.
     "The government has shouldered too many responsibilities, and it needs to
simplify its functions in a bid to reduce government spending," Zhang said. "We
could consider the sale of some state-owned assets to replenish the social
securities fund and help reduce fiscal pressure," she added.
     Another issue that Zhang highlighted is working out how to help smaller
companies who are struggling with slower domestic and overseas demand. Small
business is undergoing a hard time, as the external demand that most of them
have depended on has been largely blocked, she said.
     She also expressed concern over local government borrowing, saying they
will be unable to deal with their level of debts expected to come due in a few
years, then likely needing a central government bailout.
     "The most likely method to cope the outstanding debt is postponing them via
debt swaps," Zhang said, suggesting one solution would be for the central bank
to issue special treasury bonds.
     Zhang also said the local governments should increase transparency and show
their balance sheets, helping to make the debt raising process more uniform.
     She also argued for greater flexibility over the actual level of the yuan,
explaining the exchange rate is an important cushion against external risks. If
yuan's ability to fluctuate is curbed, the outside risks could shake the
domestic market, Zhang said.
     She also noted the physical cost to the forex reserves of defending the
currency against any given level.
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--MNI Beijing Bureau; +86 10 8532 5998; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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