MNI POLICY: China Should Cut Benchmark Rate As Econ Slows: BOC

     BEIJING (MNI) - Chances are rising that China will need to cut the

benchmark lending rate in the second half of the year as economic headwinds pick

up and the U.S. Federal Reserve moves to ease its policy, the Bank of China's

research team said Wednesday in its quarterly outlook.

     Current benchmark lending rate levels have hindered reducing actual lending

rates, leaving open the possibility for policy action from the People's Bank of

China, particularly as the U.S. economy and the dollar start to lose steam, Zong

Liang, chief researcher at the BOC's Institute of International Finance told

MNI.

     Zong warned, however, that it needed to be judged that Fed easing was a

trend, and not a blip in a hiking cycle, otherwise a knee-jerk action to follow

"would pressure our capital flows".

     BOC, one of China's big four state-owned bank, highlighted the following

points in their note:

     --Monetary policy must enhance counter-cyclical moves in H2. The PBOC

should continue to use monetary tools, including the targeted medium-term

lending facility and the standing lending facility, and to optimize the reserve

requirement ratio framework further in a bid to keep liquidity at ample levels.

     --BOC predicted M2 would grow 8.6% this year, compared with 8.1% in 2018.

     --The PBOC would cut its market operation rates, including DR007, TMLF and

MLF, along with the loan prime rate, helping lower actual lending rates.

     --The total social finance would increase at 10.6% from last year's 9.8%

     --GDP is expected be 6.4% for the whole year, but headwinds will be

substantial until the outcome of the U.S./China trade talks is clearer. The

impact of additional tariffs is starting to have a noticeable effect, the note

said.

     --There are domestic risks, including local government debt, small banks'

credit and small businesses' debt defaults.

     --The ongoing trade dispute with Washington will push China's banks to

improve their operations, as business done in dollars and with the U.S. will

face stricter compliance inspections.

     --Sectors relying on the U.S., including hi-tech, would be hit, impacting

lenders' businesses in the US and perhaps even their operations across the

Americas. But the NPL ratio of listed banks would remain low at around 1.5% in

2019.

     --Further stimulus is expected from fiscal policy in H2, including further

tax and fee cuts targeting consumption, alongside additional corporate income

tax cuts. The authorities would continue to boost infrastructure investment via

issuing special government bonds.

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

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MI$$$$]