MNI INTERVIEW: China Should Prolong Stimulus Beyond Epidemic

     BEIJING(MNI) - China should continue strong stimulus measures even once

supply-side disruption from coronavirus is fully resolved in order to support

demand which had already been weakening before the epidemic, a senior policy

advisor and former member of the central bank's monetary policy committee told

MNI.

     In an interview, Yu Yongding said China should also tighten capital

controls at a time when global financial markets are in upheaval, and, in the

longer run, rethink its position in international supply chains.

     "The epidemic has imposed a severe challenge to the country, which has been

seeing an economic slowdown for over a decade ... both fiscal and monetary

policies should enhance the expansive stance, particularly the fiscal

authorities who should boost infrastructure investment at a strong pace," said

Yu, who served on the People's Bank of China's MPC from 2004 to 2006.

     Policy makers will have to accept a fiscal deficit/GDP ratio of more than

3% and the PBOC should when necessary carry out additional easing moves, said

Yu, now a senior fellow at the Chinese Academy of Social Sciences. Attaining GDP

growth of above 5% this year will be "very hard," he warned.

     --DE-GLOBALISATION

     The pandemic could prompt de-globalisation and partial decoupling of supply

chains, Yu said, adding that China should safeguard its security in foods and

energy and ensure its capacity to produce key goods independently.

     Authorities should also tighten capital controls, he said. Frequent, large

speculative flows could otherwise provoke disorder in domestic markets and

damage the economy.

     Low core inflation, and robust demand for government bonds, means there is

still room for more expansive fiscal and monetary policies.

     "Economic indicators, such as soft corporate profits and declining imports,

showed the economy is suffering from weak domestic demand," the prominent

economist said.

     Headline consumer price inflation has risen over 5% in the past two months,

but core CPI, excluding fuel and soaring food prices, dropped to 1% in February.

Producer price inflation has been negative since last July, other than for in

January, according to National Statistics Bureau data.

     "Monetary policy can expand further," Yu continued, noting that the

worsening of inflation is a result of supply-side shock rather than overheating

and so should not prompt conventional monetary tightening.

     --MORE PUBLIC BORROWING

     At the same time, hearty demand for government bonds from households and

the financial sector would make more public borrowing easier, he said.

     "A bigger fiscal deficit will not trigger risks as long as the public debt

can be rolled over," he said.

     Infrastructure investment, particularly in public facilities, will be a key

vehicle for stimulus, Yu said, but the central government, not local ones,

should be the main provider of funds and projects must be strictly evaluated to

avoid white elephants.

     More immediately, policies should focus on assisting the recovery of the

functioning of the economy, via the provision of fiscal subsidies and ample

liquidity, as well as by cuts in taxes and fees, Yu said.

     Since 2015, Yu has argued that the Chinese economy needs to continue to

expand strongly, adding his voice last year to those of other leading economists

insisting that growth should remain above 6%.

     "I still think that we should try to achieve growth close to potential,

which is about 6% in the long run," he said.

     Robust growth would be crucial to boosting the confidence of private

investors, whose pessimism regarding the outlook for profits has dragged down

investment. Combined with high leverage and declining factory gate prices, there

is a danger that, without stimulus, the economy could get stuck in a rut, Yu

said.

     Government investment in infrastructure will bolster profits and boost

private investment, Yu said. The fall in GDP growth from 12.2% in Q1 2010 to 6%

in Q3 2019 was mainly due to a slowdown of fixed-asset investment, he said.

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

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