MNI INTERVIEW: China Mush Push Pro-Mkt Reform: Ex-Govt Advisor

--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

said.

     --DEFICIT DEBATE

     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

governments.

     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.

     --LOCAL GOVERNMENT

     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.

     --YUAN FLEXIBILITY

     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: 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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