REPEAT: MNI: China May Fine-turn Policies On Liquidity Risk

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.

     --LIQUIDITY RISK

     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

2017.

     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.

     --RRR/OMO SWAP

     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.

     --ECONOMIC DOWNTURN

     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

said.

     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

6.4.

     "All in all, the policies needs to maintain flexible and stable in current

situation," Xu said.

--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