MNI INTERVIEW: State Economist: Fin Risk, Not Infl China Worry

--PBOC Should Look To Link MonPol To Assets, Not Inflation

--See PBOC Tied On Policy Action: No Short-Term Hike, No Med Term Easing

     BEIJING (MNI) - China should maintain a prudent stance on liquidity and

strictly manage capital outflows to help tackle financial risks, whilst also

guiding growth to a sustainable level, a leading government economist told MNI

in an exclusive interview.

     "The central bank is endeavouring to strike the middle ground of

controlling leverage ratios without triggering a crisis, while guiding growth

onto a more sustainable path," said Zhu Baoliang, the chief economist at the

State Information Center. Zhu is an adviser to former Premier Li Keqiang's State

Council.

     With benign inflation and some concern over a modest economic downturn, a

benchmark interest rates hike is not an option for the People's Bank of China at

present, Zhu stressed.

     However, rather than pegging against inflation, monetary policy should be

linked with asset prices, including property prices, which more accurately

reflect the economy's risk levels, Zhu said. 

     "House prices are an important criterion gauging risks. Although prices are

basically controlled via administrative methods, the expectation for price rises

is still big. There is still controversy about policies in the property sector,"

Zhu noted.

     Looking at levels of financial leverage in China, Zhu said the deleveraging

campaign is to allow slower growth, not to eliminate debt. Leverage ratios were

increasing at 15 percent annually for years, and that's very dangerous, he

noted, adding that a 5% growth rate is more acceptable.

--ASSET PRICE CLEAN UP

     The world's second biggest economy has taken the ambitious step of cleaning

up inflated asset prices following almost a decade of loose credit. Surging

property prices, sprawling local government debt and zombie state-owned

enterprises are among the key challenges faced as President Xi Jinping pursues

his supply-side reform agenda.

     In the last two years, as the government took tough measures to close down

inefficient steel plants, coal mines and petrochemical factories, overproduction

was curtailed, helping boost prices of basic commodity products, likely an

ongoing process. 

     To accomplish the daunting tasks of maintaining quality growth without

adding debt, it is essential to sort out structural problems deeply rooted in

the Chinese economy, Zhu said. 

     That may include shutting down inefficient state owned enterprises that

drain government finance, cleaning up the myriad forms of local government

borrowing, and regulating shadowy financial dealings to channel capital into

funding activities in the real economy.

     These are formidable challenges, which is why the party leadership have

given the government three years to tackle the issues, and not just not one, Zhu

said. 

     "In the next three years, it won't be possible to see monetary policy

easing again," Zhu stressed.

--MODEST INFLATION

     On the bright side, inflation is seen as modest, despite surging commodity

prices. According to China Commodity Prices index compiled by the Ministry of

Commerce, the headline CCPI stood at 140.34 earlier this month, the highest

since April, 2013. 

     "Rising prices have been due to supply constrain caused by reform; they are

not driven by demand, which has stayed flat, so a pickup in inflation is not a

concern to the policy-maker," Zhu said. CPI in 2017 rose 1.6%, decelerating from

the 2.0% gain seen in 2016, while PPI increased 6.3%, compared with a decline of

1.4% in 2016.

     But Zhu also cautioned that excessively tight monetary policy can also be

harmful. According to the PBOC's latest quarterly monetary policy report,

published in November, the average loan interest rate rose 49 basis points to

5.76% in the first three quarters in 2017, compared with an unchanged rate in

2016.

     In addition to hurting private businesses, higher borrowing costs may also

lead to a pick up in bad debt, therefore non-performing loans held by banks will

increase. Banks will step back from lending, further shrinking credit, which can

destabilize growth, Zhu noted.

--CAPITAL CONTROLS

     Zhu also argued for continued capital controls, even as China's FX reserves

rose by $21.5 billion to $3,161 billion in January, the 12th consecutive monthly

gain in the FX reserves level.

     "The additions to the forex reserve balance has been marginal, and there is

still enormous pent-up desire to move money out," Zhu said. Regulators may ease

some of the temporary curbs imposed last year to help arrest the yuan's

depreciation, but they will not let their guard down, 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; tel: +44 203-586-2225; email: les.commons@marketnews.com

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