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MNI (London)
Repeats Story Initially Transmitted at 05:44 GMT May 16/01:44 EST May 16
--China GDP Would Grow at 6.7% For The Year: Advisor
--USDCNY May Fluctuate in a range of 6.2 to 6.4 in 2018
     BEIJING (MNI) - China policy makers could fine-tune current monetary and
fiscal policies to head off liquidity risks in both the financial and real
economies, Xu Hongcai, deputy chief economist at the China Center for
International Economic Exchanges, an advising-body run by China Development and
Reform Committee, told MNI in an interview.
     "Liquidity risk will be the biggest risk the economy faces during the
process of deleveraging over the next three years," said Xu, stressing that the
tone of a "prudent and neutral" monetary policy and "proactive and Expansionary"
fiscal policy will not change.
     "Debt-ridden companies and even local governments can hardly react at a
prompt pace to the sudden tight credit situation, particularly when the economic
downturn pressure is building, so they are having a hard time," he added.
     So far in 2018, there have been 20 corporate bond defaults involving 12
companies, totalling CNY15.66 billion. That compares with CNY12.69 billion in
the same period last year, according to Wind, a Chinese financial data provider.
     Xu expects that policy makers would adjust previously tight policies at a
moderate pace, by relaxing control on local government fund-raising and further
relaxation of the reserve requirement ratio of banks in a bid to deal with the
credit risk and, more importantly, to boost the economy.
     While the asset management industry is shrinking under tighter financial
regulation, the capability of companies to raise funds and repay debt is sharply
reduced as their channels of funding decrease and costs rise.
     "Monetary policy will be flexible. The central bank would adjust its credit
quotas, a criteria set by PBOC's macro-prudential assessment, accordingly if it
notices the real economy is suffering a liquidity crunch. But in general, a
tight liquidity will be a new normal," Xu said, adding that M2 growth this year
would be slightly lower than the nominal GDP growth after growing only 8.2% in
     Meanwhile, regulators will focus on structural deleveraging targeting local
governments. That means "illegal channels" of raising debt, including those via
local government funding vehicles, will be strictly curbed, while simultaneously
opening up "legal channels", such as continuing to allow local governments to
roll over maturing debt and issue long-term debt, the advisor said.
     One practical approach to solving liquidity risk is a further cutting of
the RRR, Xu suggested.
     The PBOC announced unexpectedly on April 17 that it would cut the amount of
cash that most banks are required to hold in reserve by one percentage point --
the first across-the-board reduction since March 2016 -- to release cash into
the banking system.
     "I think the PBOC will continue to reduce RRR by swapping its outstanding
open market operation tools, such as repos, medium-term lending facility and
standing lending facility, to inject long-term capital, lower bank's funding
cost while reducing volatility in the money market," he noted.
     A reduction in the RRR is also a way to deal with the imbalanced growth of
loan and deposits of commercial banks while the loan expansion is much more
rapid than that of deposit.
     "This imbalance is unsustainable, which needs the PBOC to release liquidity
via an RRR cut," Xu warned.
     Xu believes China is still facing big economic downturn pressures, as
domestic consumption remains weak, exports suffer uncertainty and investment
slows under tight credit control.
     "Although it is not hard to reach the 6.5% GDP target for the year, we will
not see growth of 6.9% like last year. I predict GDP will increase by 6.7%, but
under the condition that the Sino-US trade conflict would not get worse," Xu
     The major economic indicators have also shown a slowing in April,
particularly in consumption and investment.
     Xu is concerned about year-end inflation, with a prediction that CPI would
rise to 2.2% on rising costs in the real economy which is attributed by
increasing labor wages, the yuan appreciation and reducing production out of
environmental protection campaign. In the meantime, uncertainty over the crude
oil price surge would drag up PPI this year.
     He thinks M2 would grow at a pace slower than 8.9% and the yuan largely
would remain stable against the U.S dollar, fluctuating in a range of 6.2 to
     "All in all, the policies needs to maintain flexible and stable in current
situation," Xu said.
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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