MNI INTERVIEW: PBOC May Cut Rate to Ease Slowdown: Ex-Official

--'Neutral' Monetary Policy Turns Marginal Easing In Practice

--PBOC May Avoid Stressing Economy and Not Follow Next Fed Rate Hike

     BEIJING (MNI) - The People's Bank of China may lower its benchmark one-year

deposit rate to reduce banks' funding costs and boost demand if the economy

faces an increased risk of a downturn, Wu Ge, former head of the central bank's

monetary policy division, told MNI in an exclusive interview.

     "Considering the current economic situation, there is space to cut the

benchmark deposit rate, but no possibility for a rate hike as the rates on loans

get pushed up by tight financial regulations," said the economist, who also

worked for the International Monetary Fund in Washington. 

     Wu's prediction suggests that the loosening bias of the PBOC's monetary

policy may increase after the central bank cut lenders' required reserve ratio

(RRR) by 1 percentage point last week, injecting CNY400 billion cash in a sign

of easing. 

     Wu, now chief economist with Huarong Securities, added that deposit and

loan interest rates will move in the same direction in the long term.

     Cutting the deposit rate is only one of the many tools the central bank has

at its disposal, the former PBOC insider explained. It may also choose to cut

the reserve ratio requirement (RRR), increase base money injection, and even

increase loan quotas, if the economy is really at the risk of a hard-landing, he

said. 

     MNI reported this week that China may further cut the RRR, citing comments

from an exclusive interview with a PBOC official.

     --SLOWDOWN PROSPECT

     The world's second-largest economy is confronting a growing prospect of a

slowdown as domestic investment cools and a trade spat with the U.S. impairs the

outlook for exports.

     The slowdown is largely due to tight policy imposed earlier and the

deepening of the current deleveraging campaign, Wu said. The intense financial

regulatory push has dragged M2 growth down to 8.2% in March, the slowest on

record.

     "If the policy tightens further, damages to the real economy will emerge

more quickly," Wu noted.

     In addition, overseas demand is losing the positive momentum seen last year

as weakening PMI indices of major economies point to a slowdown in the global

economy, Wu said. As external demand is one of the three pillars of the Chinese

economy, softening exports can deal a heavy blow, Wu argued.

     --CRISIS PREVENTION

     "When the economy is under great downturn pressure, the focus of policy

will shift to preventing that crisis, so the deleveraging campaign will take a

backseat," Wu said. While policymakers have said they would tolerate growth as

slow as 6.5%, should the jobless rate rose in the first quarter, it would be

hard to imagine them sitting still, he said. 

     The monetary policies of China and the U.S will diverge even more as the

two economies face different economic realities, Wu said. "The PBOC won't likely

raise interest rates following the Federal Reserve's (forecast) rate hike in

June" if China's economy is slowing, Wu said.

     Given that China still effectively and strictly controls capital flows, a

U.S rate hike won't draw significant capital away from China, so the PBOC may

not see the need to respond with its rate hikes, Wu said.

     Yet neither should the market count on a generous easing either, Wu said.

While the central bank fine-tunes its bias under economic pressure, that bias

remain a prudent and neutral one, he said.

     "A marginal easing dose not means the PBOC would let institutions add

leverage" and the central bank will keep the banks on their toes so they won't

misuse the additional liquidity again, Wu 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; tel: +44 203-586-2225; email: les.commons@marketnews.com

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