MNI INTERVIEW: China Seen Cutting Growth Target Amid Trade War

--MNI Interview With Bank of China Economist Zong Liang

--China ODI to U.S. Sharply Drops: BOC Zong

--China to Provide Credit Bailout To Impacted Sectors: Zong

--USDCNY at 6.6 a "Comfortable Level": BOC's Zong 

     BEIJING (MNI) - China may accept slower growth and selectively boost

liquidity to help lessen the impact of the trade war with the U.S., Zong Liang,

vice general manager of the Strategic Department at the Bank of China (BOC),

told MNI in an interview.

     Policymakers may allow "a modest drop of the GDP target" if the conflict

escalates to the extreme, Zong said. The central bank will support the sectors

hardest hit by the ongoing conflict by preferential credit measures, such as

reducing the reserve ratio, he said. 

     "The trade war is the biggest uncertainty for China's economy, which will

push the country to further open up the domestic market and accelerate to

explore new outside markets," said Zong, who is also the chief researcher at

BOC.

     Zong spoke to MNI after the U.S. announced on Tuesday a checklist to place

a second round of tariffs on a further $200 billion of Chinese imports,

following the first round of levies on $34 billion goods imposed on July 6.

Beijing immediately responded with countermeasures.

     The economist, who advises the government on policy-setting, expects more

China-U.S. confrontation and retaliatory measures before things improve.

     --SPENDING POTENTIAL

     However, the domestic market's spending potential will offset some of the

impact of a trade war, so the country will press on with the opening up of its

goods and capital markets and attract foreign participation, he said.

     "China will significantly lower the barriers of entry in some key sectors,

such as automobile, medicine while cutting tariffs for other trade partners,

particularly for other soybean exporters," Zong said.

     In addition, the country is trying to attract foreign capital by easing

controls and becoming a friendlier destination for investment.

     "The opening-up policies involving financial markets will help attract

global capital and prevent investment from flowing all to the U.S. under the

trade war threats, which is also a measure to counter the extreme American

policy," Zong said.

     --NEW INVESTMENT DESTINATIONS

     China will seek out new investment destinations and pursue initiatives such

as the Belt and Road to offset the loss of exports into the U.S., said Zong.

     Direct investment into the U.S from China will likely plunge. "The 'America

First' principle and the protectionism the U.S upholds will discourage Chinese

companies," said Zong. China's government will also discourage its companies

from investing in the U.S., he said.

     ODI from China to the U.S. in the first five months plunged 92% from last

year to USD 1.8 billion, the least in seven years, according to a report last

month by the research firm Rodium Group.

     The current so-called structural easing is appropriate for the current

economic conditions by improving the targeted enforcement, according to Zong.

     --STRUCTURAL TOOLS

     "Both the domestic real economy and the outside situation do not leave much

space for big changes in China's interest rates, so structural tools, including

targeted RRR cuts, are the right option," Zong said. 

     "Against the backdrop of the trade war, we need to prepare our companies,

particularly those that may be heavily hit, so the policy will provide some

liquidity support," he said.

     However, Zong warned that the central bank should gauge the pace of further

RRR cuts against the impact of the trade spat and unstable yuan exchange rate.

     As a specialist at BOC in charge of one-fourth of the cross-border yuan

settlement in China, Zong said the band of the yuan's volatility against the

U.S. dollar has been confirmed in the recent years, so  USDCNY6.3-6.9 should be

a comfortable level. 

     "USDCNY at about 6.6 is appropriate being in the middle of the band," Zong

said. As the currency is a managed float, the yuan will not experience sharp

volatility like the U.S. dollar, he said.

--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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