MNI SOURCES: China Policy Moves Pro-Growth as Economy Sputters

--Top Policymakers Urge Defending 6.5% GDP Growth Target: Source

--Investment, LGFV May See Boost in H2 2018

     BEIJING (MNI) - China is taking more aggressive action to stimulate its

economy, currently under threat from a broad domestic credit shrinkage and

slowing investment at a time when a protracted trade spat with the U.S. clouds

the outlook of trade.

     The State Council, China's cabinet, drummed up further efforts to ensure

economic growth during its regular meeting late Monday. The top-level meeting,

chaired by Premier Li Keqiang, called for "boosting domestic demand" for the

second time this year, with greater urgency as both investment and industrial

growths slowed at an unexpected pace in the second quarter. 

     "Given the current complicated situation, it is necessary for the top

leadership to unify all relative parties, particularly the central bank and the

finance ministry, to carry out policies more effectively," a source close to top

policymakers told MNI. 

     "Pressure within the country is even bigger than the ones coming from

outside, so some previous measures, such as tough financial regulations, must

yield to economic growth first," the source said. 

     --6.5% TARGET

     "All in all, we won't allow growth to fall much from the targeted 6.5%,"

said the source.

     The cabinet said Monday that fiscal and financial policies should be

coordinated to serve the real economy and the bigger growth picture.

     While Premier Li emphasized that the new direction won't turn into a "major

flood" of credit, it becomes clearer that the deleveraging campaign is not a top

policy priority -- at least for now.

     The People's Bank of China (PBOC) led the dovish monetary policy shift with

a series of measures aimed at loosening the grip on liquidity and credit.

     --CHINESE QE

     On Monday, the central bank unexpectedly injected CNY502 billion into the

system via the medium-term lending facility (MLF), the biggest addition of

credit via MLF on record. The move has been dubbed a Chinese-style quantitative

easing (QE).

     "We did not expect this (MLF) to happen because the liquidity in the

interbank market has already been adequate recently," a manager of a

Beijing-based bank told MNI. "Without question, the PBOC has shifted away from

its tight stance," he said.

     That record injection was made just days after the PBOC and financial

regulators announced new rules on asset management products, lifting the

crackdown on non-standard products by lenders' shadow banking funding channels,

a vital source of funding for the country's private sector.

     Together with the PBOC's pushing lenders to buy low-grade corporate bonds

by window guidance, along with granting expanded credit quotas last week, the

central bank is clearly moving to underpin growth.

     --PUBLIC FEUD

     In a rare public display of disagreement, leading economists from the PBOC

and Ministry of Finance took to the media to debate who needs to play a more

active role in the campaign to prevent risk build-ups. The PBOC charged that

fiscal policy has been far less "proactive" in the first half, as evidenced in

that fiscal spending increased at a far slower pace than the boom in fiscal

revenue.

     Yesterday's State Council seemed to have partly settled the debate, asking

the finance ministry for a "more proactive" fiscal policy. The country will cut

corporate tax on research and development spending by up to CNY65 billon, adding

to the initial target of reducing CNY1.1 trillion of tax and fees for the year.

The leadership also hastened the launch of CNY1.35 trillion in special bonds for

infrastructure investment.

     "In the second half, infrastructure investment will rebound and local

government will be allowed to borrow more again; that is good news for the

economy," the first source 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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