MNI INTERVIEW: Stock Surge May Curb PBOC Further Easing: Zhang

--Fiscal Stimulus Limited By Reduced Tax Revenue: Zhang Bin

     BEIJING (MNI) - Surging Chinese stocks could constrain the People's Bank of

China's opportunities to further ease policy in coming months, although any

sharp downturn in the economy may still open the way for rate cuts, Zhang Bin, a

senior fellow at the China Finance 40 Forum think tank, told MNI.

     Further easing could add fuel to an already on-fire stock market,

underpinned by low rates and abundant liquidity, Zhang said, while noting

policymakers could already be on his wavelength.

     "Policymakers are still cautious over large easing and may prefer a

marginally tighter stance if the economic situation is improved," he added,

repeating Premier Li Keqiang's recent comments warning against a flood of easy

money.

     In coming months, Zhang said, looser policy would boost asset prices but

may not support the real economy, which could see a further slowdown leading to

lower profits, weaker tax revenues and increased corporate debt.

     China stocks have rallied sharply this year, recouping much of the downside

seen through 2018.

     --KEEP CUT OPTION

     Zhang added that it was too early to remove the option for rate cuts,

particularly if overall demand was weak in the second quarter and the economy

faced deflationary pressure as industrial prices and profits fall, predicting

the PBOC may be happy to watch from the sidelines, waiting for greater clarity.

     His overall outlook remains gloomy, seeing both external and domestic

weakness and export growth will slow as global demand shrinks and the impact

from tariffs filters through.

     He also expressed concern over the sustainability of manufacturing

investment growth due to soft industrial profits, low capacity utilization rates

and weak investment levels.

     Slower infrastructure investment and a slowing property sector will also

offer limited support to the economy, Zhang said.

     --LIMITED FISCAL STIMULUS

     Zhang, also a director of the Global Macroeconomy Research Division of the

Chinese Academy of Social Sciences, predicted no big pick-up in infrastructure

investment this year, as fiscal spending will be constrained by the ongoing

tax/fee cuts and reduced tax revenue, while the authorities are reluctant to

push a big increase in the fiscal deficit.

     His overall outlook remains gloomy, seeing both external and domestic

weakness and export growth will slow as global demand shrinks and the impact

from tariffs filters through.

     He also expressed concern over the sustainability of manufacturing

investment growth due to soft industrial profits, low capacity utilization rates

and weak investment levels.

     Slower infrastructure investment and a slowing property sector will also

offer limited support to the economy, Zhang said.

     --LIMITED FISCAL STIMULUS

     Zhang, also a director of the Global Macroeconomy Research Division of the

Chinese Academy of Social Sciences, predicted no big pick-up in infrastructure

investment this year, as fiscal spending will be constrained by the ongoing

tax/fee cuts and reduced tax revenue, while the authorities are reluctant to

push a big increase in the fiscal deficit. 

     Special bonds would not boost general infrastructure investment at a large

pace under the current financing mechanism, Zhang noted, saying almost half of

infrastructure investments in 2018 were non-profit quasi-welfare projects and

therefore not the target of special government bonds. 

     --CREDIT DEMAND

     For Zhang, the PBOC's latest moves to push credit expansion will not offset

the impacts of previous deleveraging restrictions, with traditional channels of

credit provision blocked, so a new credit mechanism is needed "to stabilize

economy and prevent debt risks".

     Any new mechanism should focus on increasing general local government bonds

to help finance public welfare projects, enriching long-term financial products

including launch of the real estate investment trusts (REITs)and guaranteeing

genuine financing needs of property companies, he said.

     Zhang does not believe credit policy should be used as a tool to target

rising house prices.

     "(The authorities) should not sacrifice credit expansion in a bid to curb

the price rising in the property market in certain cities," Zhang said. Higher

house prices should be targeted by increasing land supply, developing the rental

housing market and improving public infrastructure, he argued.

--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

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