MNI INTERVIEW: China Needs Macroprudential Measures-Advisor

Chinese authorities should take macroprudential measures to tackle high debt, but the People's Bank of China is expected to refrain from tightening in the near future, a senior Chinese policy advisor told MNI.

Regulators could hike lenders' capital adequacy ratio when credit ratios rise, enforce property market controls to prevent asset bubbles and supervise bank liquidity levels, Zhang Xiaojing, head of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said in an interview.

China needs a benign policy environment, with a prudent and moderate PBOC policy stance, to keep funding costs and interest payments down. It must also stabilise the leverage ratio to prevent an accumulation of financial system risks in the next five years, said Zhang, who is also a member of the China Economists 50 Forum that includes Vice Premier Liu He and PBOC Governor Yi Gang.

The pace of credit expansion, which jumped in the wake of the coronavirus pandemic, should slow in 2021, Zhang said. Total social finance, a key credit gauge, grew 13.7% in October, the most in over 2-1/2 years. Share prices and property markets also reflect ample liquidity, Zhang said.

INTEREST RATE REFORM

The central bank should continue to improve its interest rate corridor to push forward the market-oriented interest-rate reform, Zhang said. He noted that the spread between the ceiling - the Standing Lending Facility rate that is part of the bank's open market operation tools - and the floor, which is the excess deposit reserves rate - is too wide.

The PBOC could also consider reducing direct intervention in foreign exchange markets to avoid depleting forex reserves, Zhang said.

While reserves have held steady in recent months, maintaining them at adequate levels is becoming more important, he said. China faces trade spats with the U.S, together with the possible relocation of supply chains, greater capital outflows in line with the increase in foreign debt, and a shrinking current account surplus due to an ageing population and economic slowdown, he added.

Foreign reserves have ranged between USD3.0 trillion and USD3.2 trillion in the past three years, and stood at USD3.13 trillion at the end of October, according to the State Administration of Foreign Exchange.