MNI INTERVIEW: Trade Truce Enough to Bolster China H2: Ma Jun

     LONDON (MNI) - The U.S.-China trade ceasefire should largely rule out any

need for major new economic stimulus measures in the second half of the year to

maintain Chinese growth within the targeted range, according to Ma Jun, member

of the People's Bank of China Monetary Policy Committee, in an exclusive

interview with MNI.

     The PBOC's former chief economist expressed his optimistic outlook

following the weekend agreement between the America and China's leaders at the

G20 in Japan for trade talks to resume. Ma said the expectation that there would

be no further escalation in the trade conflict underlined his belief that

Beijing would have little need to go beyond existing economic stimulus measures

to sustain the required rate of growth.

     "The consensus reached by President Xi and Trump during the G20 Summit has

delivered an important and positive certainty (to China and global economy)," Ma

said. "We are confident that China's economy is likely to keep above 6% GDP

growth and below the 5.5% surveyed unemployment rate without major new stimulus

policies as long as the trade war would not escalate in H2."

     Ma believes that the agreement to restart trade negotiations has led to

market expectations that a deal would include the rolling back of some and

perhaps all of the tariffs so far imposed on Chinese imports by Washington DC.

According to Ma's model, if the US were to cut its 25% tariff applied to USD250

billion worth of Chinese goods to 10%, China's GDP growth would be boosted by

0.3 percentage point.

     Meanwhile, the PBOC's efforts to reduce funding costs will work to bolster

the economy, Ma said, stressing the importance of the current, lower, short-term

money market rates in placing effective downward pressure on corporate lending

rates.

     Moreover, in Ma's view, Beijing's large-scale tax cuts have boosted the

profit outlook for companies and provided another drive for the growth. He

cautioned against any further big tax giveaways which he did not think were

appropriate as "local government fiscal balance would be under stress if fiscal

revenue falls too much."

     --LIMITED SCOPE FOR EM EASING

     Ma conceded that the potential dovish turn in the policy direction of the

world's major central banks does grant additional room for easing in the

emerging countries. 

     "However, the easing has limits, considering the currencies of emerging

economies would depreciate and the leverage ratio would rise, particularly if

the pace of EM easing was faster than that of advanced countries," Ma warned. 

     "As we all know, a high leverage ratio will generate medium-term financial

risks, so I would caution against excessive monetary easing which would lead to

a jump in the leverage ratio."

     He also argued that it would be hard to measure the net benefits to the

real economy from monetary easing as it might fall short of offsetting the

upward pressure on funding costs from increased credit risk amid a slowing

economy. 

     "Without fiscal support such as government guarantees, it is difficult to

reduce corporate funding costs significantly in a slowdown cycle by using only

monetary tools," Ma said.

     --INTEREST RATE REFORM

     Turning to the long-awaited reform to simplify and fuse China's dual

interest rate tracks, Ma thinks the motivation for the PBOC to push on with

reform in the short term is increasing. 

     "One purpose of the reform is guiding the fall of lending rates. Now,

although the short-term market rates drop, the long-term lending side has not

seen a corresponding fall as the market rates and the lending rate are poorly

linked," Ma said.

     Ma expects that the future trajectory of market-based interest rate reform

would include "removal of the benchmark lending rate, clarifying only one short-

or medium-term rate as the policy rate, and strengthen the linkage of the loan

prime rate (LPR) with the policy rate."

     But Ma acknowledged that the reduction of funding costs for SMEs in China

should be achieved with a combination of solutions, including the

above-mentioned interest rate reform, government guarantees for SME lending,

greater transparency of SMEs' financial data, and wider application of Fintech.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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