MNI INTERVIEW: Ex-PBOC Advisor: Finance Top China Priority

By Iris Ouyang

     BEIJING(MNI) - Chinese authorities should focus their energies on better

honing their deleveraging drive and boosting credit to the real economy rather

than on the trade war with the U.S., a former advisor to the People's Bank of

China told MNI.

     "The impact of the trade war on China's economy is limited," said Li

Daokui, also a member of the Economy Committee under the National Committee of

the Chinese People's Political Consultative Conference (CPPCC). "And now, what's

most needed is to adjust our financial policies, which are not implemented in a

well-targeted way."

     Current financial policies, especially those concerning deleveraging, are

"too simple and too blunt," Li told MNI in a recent interview.

     --DELEVERAGING

     Since late 2016, Beijing has cracked down on banks' off-balance sheet

lending as well as tightened rules on asset management companies and local

government borrowing. This has made liquidity more scarce and credit access --

especially for small- and medium-sized companies -- has become more difficult.

     Authorities now have to increase the provision of social financing to the

real economy, Li said, in comments which come amid heated debate in China over

how to soften the impact of the trade war on an already-slowing economy.

     "The biggest factor affecting China's macro-economy is the lack of

adjustment in financial policies, not the trade war," Li said.

     "The deleveraging campaign would not work that well if we only shrink

credit increase," he noted. "It's just like a patient still needs to eat and

increase nutrition when you are trying to remove the cancer cells"

     The government should also require financial regulators to deal with bad

assets by setting quantity targets and specific time frames, but the most urgent

need is to reform state-owned enterprises, Li stressed.

     "The reform of local SOEs is advancing well," Li said. "But the reform of

central SOEs is still relatively slow."

     --TRADE WAR IMPACT

     In line with Beijing's estimate, Li expects the trade spat with the U.S. to

shave at most 0.2pp from China's GDP growth this year.

     Even if Washington slapped 25% tariffs on all Chinese imports, his

calculations point to a maximum impact of 0.5pp of GDP growth, Li told MNI,

adding that China could limit the impact by increasing exports to other

countries.

     The U.S. has imposed tariffs on USD250bn of Chinese goods since July. If

U.S. President Trump presses ahead with threats to target another USD267bn, all

of China's exports to the U.S. would then be subject to new duties.

     Beijing insists it will not make significant concessions to Washington, and

has played down the trade war's potential impact on its economy. At the same

time, the authorities are pursuing reforms to increase economic resilience,

including improving business and investment regulations, enhancing intellectual

property protection, increasing imports, and further opening up the economy.

     "China is very, very, very restrained in its trade action when dealing with

the U.S.," Li noted. "We need to show that we are not scared of the trade war,

because our reliance on trade has reduced significantly."

     U.S. consumers will bear the brunt of Washington's tariffs on China, Li

stressed, as many Chinese imports -- such as raw materials for making medicine

-- cannot be provided by other countries.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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