MNI INTERVIEW: PBOC Should Be Alert Defla Risk: Govt Advisor

--Monetary Policy May Be Eased in Q4 On Economic Downturn Pressure

--Benchmark Interest Rate Hike Barely Possible in 2018

--Keqiang Index Showing Weak Economic Momentum

     BEIJING (MNI) - Monetary policy should not be tightened in 2018 as China

may see deflation as early as the fourth quarter as both domestic and overseas

demand weakens, Zhang Bin, senior fellow at the China Academy of Social Science,

the Chinese government's leading think tank, told MNI in an interview.

     "Considering the economy is showing a downturn, the monetary policy needs

some adjustment to an easing bias, particularly in the fourth quarter," Zhang

said on the sidelines of a briefing held by the China Finance 40 Forum.

     The People's Bank of China announced a deposit reserve cut of 1 pp,

effective April 25, which has been interpreted by markets as a dovish move, with

a mild loosening bias as economic indicators show the economy now faces the

threat of an investment slowdown at home alongside a possible trade war with the

U.S.

     However, Zhang noted the central bank is currently maintaining a neutral

stance, as it has to take financial regulation and its deleveraging target into

account. "It will maintain a neutral bias as the economy is not expected to

slump in next two quarters, but it is hard to say it could keep the stance in

the last quarter," Zhang said.

     The advisor's view was echoed by the latest decision of the Politburo,

following a meeting Monday chaired by President Xi Jinping. According to Xinhua

News Agency, the top policymaking body stressed the need of boosting domestic

demand, the first time in three years that the meeting noted the requirement.

This means monetary policy, as a minimum, will not be as tight as seen in 2017.

--DEFLATION RISK

     According to the National Statistics Bureau, China's factory-gate inflation

cooled to a 17-month low in March, decelerating for five months in a row, while

consumer inflation also eased sharply, indicating an ebbing in demand.

     "Both PPI and CPI have lost their steam after reaching peak, meanwhile

demand may see an excessive decline since some cyclical sectors particularly

property and automobile have seen a downward trend in sales," Zhang said, noting

that property and automobile consumption are two main economic drivers.

     "It is not impossible to see a negative PPI this year," Zhang warned. 

     What is more, credit continues to be tightened as authorities extend a

clamp-down on financial risks. Long-term interest rates are rising and credit

indicators including M2 and total social finance are growing at a slow pace,

both indicating the tough reality. The credit squeeze will curb the already weak

demand, Zhang noted.

--INFRASTRUCTURE INVESTMENT

     In Zhang's opinion, a slowdown in the world's second-largest economy is

inevitable. He cited the performance of the Keqiang Index to illustrate the

situation.

     The Keqiang Index, measuring changes in the volume of rail freight,

electricity consumption and bank loans is said to reflect -- quite accurately --

periods of acceleration and deceleration in China's industrial sector.

     The latest index, named after the country's prime minister, shows that

China's growth slowed from 20.54% growth in Feb, 2017 to 6.76% by March 2018.

     "In this situation, high infrastructure investment is a next-best choice

when the household consumption softens, dragging down total investment, plus

weak exports," Zhang suggested, "A deep reform of other sectors is needed to

tackle the over reliance on infrastructure investment."

     But rising borrowing costs and cooling local government bond issuance on

the back of Beijing's crack down on debt risks would curb the infrastructure

investment to boom this year, Zhang added.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]