MNI INTERVIEW: China Rates Revamp Not Easing: Ex-PBOC Sheng

     BEIJING(MNI) - The PBOC's market-oriented overhaul of its interest rate

framework should not be regarded as monetary easing and there is little need to

cut interest rates at present, a former director of the statistics department of

the People's Bank of China told MNI.

     "The reform has two major purposes, which are to smooth monetary policy

transmission over the long term and to lower the funding cost of the real

economy over the short term," Sheng Songcheng said in an interview. "This is

different to a rate cut, since the central bank did not touch its policy rates

but rather enhanced its capacity to control real economy lending rates."

     The central bank earlier this week replaced its benchmark lending rate with

its loan prime rate as the main reference for new corporate loans. The PBOC also

linked the LPR more closely to its one-year medium-term lending facility, which

tracks market prices more closely than the old benchmark.

     The one-year LPR was priced at 4.25% Tuesday, 10bp lower than the one-year

benchmark lending rate and 6bp lower than the last LPR reading before the

reform. The new 5-year-plus LPR was set at 4.85%.

     For Sheng, a former PBOC senior advisor, the slight decline in the LPR is

compatible with stable interest rates in the context of continuing uncertainty

about the extent of further easing from major central banks including the

Federal Reserve.

     The interest rate revamp should not put downward pressure on the yuan,

which should remain stable in a range between 7 to 7.1 to the dollar this year,

unless a roll-back of U.S. tariffs sends it soaring back towards 6, he said.

     The possibility of a weaker exchange rate would not in case restrain the

PBOC from cutting rates, said Sheng, although he noted that there is no need for

any such move for the present.

     "Fiscal policy is already quite proactive. If monetary policy shifts from

its prudent stance, it could cause a flood of excess liquidity," Sheng warned.

     Consumer price inflation is now approaching the 3% target and house prices

continue to rise, he noted.

     "Although the economy faces heavy headwinds, the situation is not out of

control, since employment and income indicators still show strength," Sheng

said, predicting that whole-year GDP should expand by about 6.3%, which would

mean expansion of only 6.1% next year would be necessary to reach the target of

doubling the size of the economy through 2020.

     "We should focus on building a high-quality economy, upgrading industry and

opening up the service sector," Sheng said.

     --NEED FOR FURTHER REFORM

     As the anchor of the new LPR, the MLF rate will be the PBOC's tool for

adjusting lending rates in the real economy, Sheng noted, although he added that

the regime still requires additional reform.

     The MLF, at 3.3%, is relatively expensive, and the list of institutions

providing quotations for the rate should be expanded to include smaller lenders,

to better reflect market demand. Banks only receive 1.62% on reserves held at

the PBOC. One option might be to lower banks' reserve requirement ratios, in

order to allow them to repay existing MLF loans, which would tend to lower the

funding cost, he said.

     Authorities will be able to fine-tune the new LPR once they have had a

chance to observe how it feeds through to real economy lending rates, he added.

     The old benchmark rate should also continue to play a role during a

transition period, particularly with regards to loans for poverty alleviation or

mortgages, where the authorities would not wish to grant too free a hand to the

market, Sheng said, noting that existing loan stock will continue to use the

benchmark.

     After reforming its lending rates framework, the PBOC should also consider

adjusting its benchmark deposit rate, he said, adding that supporting lenders'

profits would avert systematic risk caused by any sudden spread decompression.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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