MNI INTERVIEW: China Must Boost Private Sector: Ex-Advisor

--Reform Better For Econ Than Prop Mkt Stimulus: Ex-Govt Advisor Yuan Gangming

     BEIJING (MNI) - If China's economy continues to slow in 2019, the

government will likely look to add stimulus via the property market, although

deep reform to support the private sector would be better for longer-term

growth, a former senior government advisor told MNI in an interview.

     "So far, there are no other drivers for economic growth next year, so the

authorities have to relax the strict restrictions on the property market, such

as tight control on credit, to buffer the economic slowdown," said Yuan

Gangming, former director of the Macro-economy Research Institute of Chinese

Academy of Social Sciences (CASS).

     Yuan, now an economics professor at Tsinghua University, warned that

previous stimulus measures, including increased infrastructure investment and

support for the property market, were not the correct medicine, as they brought

even bigger risks in long term.

     Yuan argued that to maintain a rapid annual growth, policymakers needed to

loosen control over the economy, opening up to the private sector, although he

doubted they are yet ready to do so. But without reform, a continuation of

previous 'poisonous' stimulus measures will likely drag down growth to 3 to 4%

in the longer-term.

     --NECESSARY EASING

     The People's Bank of China must maintain its easing bias, Yuan said,

blaming the current slowdown, in part at least, on previous tight policy,

although he accepted there was limited room for the PBOC to act.

     It remains a possibility for next year that the authorities carefully

loosen policy to see how the economy reacts, he said.

     But Yuan is concerned about the allocation of resources across the

financial system, with the state-owned enterprises taking a disproportionately

large share of credit available.

     "Long-term loans to SOEs take about 60% of total credit, much higher than

the 30% that I think would be a reasonable level," Yuan said. "Even if the

liquidity in the system is ample, the private sector still struggles to get

funded."

     Yuan believes a cut in the required reserve ratio would be of limited

benefit to the economy, although a cut in benchmark interest rates would support

companies, but will pressure the yuan and bank profitability.

     --STRUGGLING PRIVATE SECTOR

     The private sector continues to struggle with funding as the effects of the

deleveraging campaign reverberate.

     "Private companies are reluctant to expand ... afraid that the credit

supply would be cut when policy tightens, particularly in the period of economic

slowdown," Yuan warned.

     If policymakers could address the issue and the private sector gets access

to needed credit, growth could jump to around 8%, Yuan said. But he again

doubted the desire of the authorities to either over-stimulate the economy or

increase competition for SOEs.

     --LONG-TERM DELEVERAGING

     Yuan accepts that deleveraging is still an issue, particularly high

household leverage.

     He is less concerned about the level of government debt, as they have

adequate high-quality assets including land and the SOEs. However, corporate

debt, particularly in the private sector, is a concern as their cash flow and

profitability will suffer through a liquidity crisis.

     Therefore, central government's fiscal policy should play a greater role

through any slowdown, Yuan said, although noting Beijing's reluctance to push

the fiscal deficit above 3% of GDP. However, he does think policymakers do have

enough ammunition to prevent a severe downturn, although there would be

longer-term consequences

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

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