MNI INTERVIEW: China Should Cut Rates This Month: PBOC Scholar

--PBOC Could Cut Benchmark Interest Rates by Dec. 31, Scholar Says

--RRR Cuts, Other Concerted Easing Necessary

     BEIJING (MNI) - The People's Bank of China should cut benchmark interest

rates as early as this month to prevent a sharper economic slowdown, a scholar

affiliated with the central bank told MNI, arguing that monetary easing could

actually reduce the economy's debt ratios.

     In addition to making its first rates cut since October 2015, the PBOC

should also lower banks' reserve requirement ratios and pump in liquidity

through open market operations in a bid to reduce the costs of business's

financing and of mortgages as soon as possible, Professor Zhou Hao, associate

dean at the PBOC School of Finance, Tsinghua University, said in an interview.

The school was previously a research institute responsible for training

officials at the central bank, and its current honorary dean is former Governor

Zhou Xiaochuan.

     "The PBOC has made three cuts in reserve requirement ratios and guided

money market rates lower, but these haven't been enough," said Zhou Hao, also

director of the Monetary Policy and Financial Stability Research Center of

Tsinghua University's National Institute of Financial Research, arguing that the

government should boost infrastructure spending and err on the side of risking a

property bubble.

     Zhao dismissed concerns that lower interest rates might prompt a

significant depreciation in the Chinese currency.

     --YUAN RISK LIMITED

     "As long as the capital account policy remains stable, there will be no big

problems with the yuan," Zhou noted, adding that a weaker exchange rate would

favour exports and that Chinese companies' external funding liabilities are not

big enough to pose systemic risk.

     His comments came as the yuan has appreciated following a G20 dinner

between President Xi Jinping and his U.S. counterpart Donald Trump, prompting

some market speculation that the PBOC might have more room for a rates cut.

     China's growth fell for a second consecutive quarter to a decade-low 6.5%

from July to September, even as the PBOC earlier this year began reversing its

previous so-called neutral policy position. But, while businesses complain of a

lack of funding and corporate bond defaults spike amid fears rise of a deeper

slowdown, some officials and economists have cautioned against abandoning

official efforts to cut debt levels at a full pace.

     Total debt rose to 250.3% of GDP at the end of 2017, according to the PBOC,

much of it the legacy of the credit-fuelled expansion which kept China's economy

powering along after the global financial crisis. Many in government now feel

that the fiscal component at least of this expansion cannot safely be repeated,

and concerns simmer about the debts of state-owned enterprises in particular.

     --KEY POLICY MEETINGS

     Speaking ahead of a series of crucial government meetings this month which

could clarify the domestic policy stance, including the Central Economic Work

Conference chaired by President Xi Jinping, Zhou argued that monetary easing

policy will not necessarily raise leverage. If it delivers a moderate boost to

inflation, and if rigorous lending standards are maintained, debt ratios may

actually fall, he said.

     Targets for M2 broad money and inflation should be raised to keep real debt

levels in check and to boost growth, Zhao said, adding that overall debt levels

are not too high, although SOEs should not be allowed to leverage up further.

     "The (non-state) corporate and household sectors should add leverage, while

that of SOEs and local governments should be kept stable," Zhou said. The

current policy of boosting credit and bond issuances of small companies goes in

the right direction, he said.

     Regulators have started to relax financial regulations, including reversing

earlier curbs on shadow banking and property market, and the government has

signalled that it is loosening controls over the property market, Zhou said.

     "Compared with having a property bubble, plunging house prices would be

more dangerous to the economy, as the property sector remains a key driver in

China's urbanization and growth," he said.

     The government will also deliver a boost to infrastructure spending next

year, as its effect will be felt quickly in the rest of the economy, Zhou said.

Authorities should not attempt to overly stimulate consumption spending in a

country with annual capita annual income of USD8,000, he said.

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

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