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--PBOC Could Cut Benchmark Interest Rates by Dec 31, Scholar Says 
--RRR Cuts, Other Concerted Easing Necessary
     BEIJING (MNI) - The People's Bank of China (PBOC) should cut benchmark
interest rates as early as this month to prevent a sharper economic slowdown, a
scholar told MNI, arguing that monetary easing could actually help reduce the
economy's debt ratios.
     In addition to making its first rates cut since October 2015, the PBOC
should also lower banks' reserve requirement ratios and pump in liquidity
through open market operations to reduce the costs of business financing and
mortgages as soon as possible, Professor Zhou Hao, associate dean at the PBC
School of Finance, Tsinghua University, said in an interview.
     "The PBOC has made three cuts in reserve requirement ratios and guided
money market rates lower, but these haven't been enough," said Zhou, arguing
that the government should boost infrastructure spending and err on the side of
risking a property bubble.
     Zhou dismissed concerns that lower interest rates might prompt a
significant depreciation in the Chinese currency.
     "As long as the capital account policy remains stable, there will be no big
problems with the yuan," Zhou noted, adding that a weaker exchange rate would
favour exports and that Chinese companies' external funding liabilities are not
big enough to pose systemic risks.
     China's growth fell for a second consecutive quarter to a decade-low 6.5%
from July to September, even as the PBOC earlier this year began reversing its
previous so-called neutral policy position. But, while businesses complain a
lack of funding and corporate bond defaults spike amid fears rise of a deeper
slowdown, some officials and economists have cautioned against abandoning
official efforts to cut debt levels at a full pace.
     Total debt rose to 250.3% of GDP at the end of 2017, according to the PBOC,
much of it the legacy of the credit-fueled expansion which kept China's economy
powering along after the global financial crisis. Many in government now feel
that the fiscal component at least of this expansion cannot safely be repeated,
and concerns simmer about the debts of state-owned enterprises in particular.
     Speaking ahead of a series of crucial government meetings this month, which
could clarify the domestic policy stance, including the Central Economic Work
Conference chaired by President Xi Jinping, Zhou argued that monetary easing
won't necessarily raise leverage. If it delivers a moderate boost to inflation,
and if rigorous lending standards are maintained, debt ratios may actually fall,
he said. 
     Targets for M2 broad money and inflation should be raised to keep real debt
levels in check and to boost growth, Zhou said, adding that overall debt levels
are not too high, although SOEs should not be allowed to leverage up further.
     "The (non-state) corporate and household sectors should add leverage, while
that of SOEs and local governments should be kept stable," Zhou said. The
current policy of boosting credit and bond issuances of small companies goes in
the right direction, he said.
     Regulators have started to relax financial regulations, including reversing
earlier curbs on shadow banking, and the government has signaled that it is
loosening controls over the property market, Zhou said.
     "Compared with having a property bubble, plunging house prices would be
more dangerous to the economy, as the property sector remains a key driver in
China's urbanization and growth," he said.
     The government will also deliver a boost to infrastructure spending next
year, as its effect will be felt quickly in the rest of the economy, Zhou said.
Authorities should not attempt to overly stimulate consumption spending in a
country with annual capita annual income of USD8,000, he said.
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--MNI Beijing Bureau; +86 10 8532 5998; email:
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