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MNI (London)
Repeats Story Initially Transmitted at 10:33 GMT Feb 8/05:33 EST Feb 8
--PBOC Should Look To Link MonPol To Assets, Not Inflation
--See PBOC Tied On Policy Action: No Short-Term Hike, No Med Term Easing
     BEIJING (MNI) - China should maintain a prudent stance on liquidity and
strictly manage capital outflows to help tackle financial risks, whilst also
guiding growth to a sustainable level, a leading government economist told MNI
in an exclusive interview.
     "The central bank is endeavouring to strike the middle ground of
controlling leverage ratios without triggering a crisis, while guiding growth
onto a more sustainable path," said Zhu Baoliang, the chief economist at the
State Information Center. Zhu is an adviser to former Premier Li Keqiang's State
     With benign inflation and some concern over a modest economic downturn, a
benchmark interest rates hike is not an option for the People's Bank of China at
present, Zhu stressed.
     However, rather than pegging against inflation, monetary policy should be
linked with asset prices, including property prices, which more accurately
reflect the economy's risk levels, Zhu said. 
     "House prices are an important criterion gauging risks. Although prices are
basically controlled via administrative methods, the expectation for price rises
is still big. There is still controversy about policies in the property sector,"
Zhu noted.
     Looking at levels of financial leverage in China, Zhu said the deleveraging
campaign is to allow slower growth, not to eliminate debt. Leverage ratios were
increasing at 15 percent annually for years, and that's very dangerous, he
noted, adding that a 5% growth rate is more acceptable.
     The world's second biggest economy has taken the ambitious step of cleaning
up inflated asset prices following almost a decade of loose credit. Surging
property prices, sprawling local government debt and zombie state-owned
enterprises are among the key challenges faced as President Xi Jinping pursues
his supply-side reform agenda.
     In the last two years, as the government took tough measures to close down
inefficient steel plants, coal mines and petrochemical factories, overproduction
was curtailed, helping boost prices of basic commodity products, likely an
ongoing process. 
     To accomplish the daunting tasks of maintaining quality growth without
adding debt, it is essential to sort out structural problems deeply rooted in
the Chinese economy, Zhu said. 
     That may include shutting down inefficient state owned enterprises that
drain government finance, cleaning up the myriad forms of local government
borrowing, and regulating shadowy financial dealings to channel capital into
funding activities in the real economy.
     These are formidable challenges, which is why the party leadership have
given the government three years to tackle the issues, and not just not one, Zhu
     "In the next three years, it won't be possible to see monetary policy
easing again," Zhu stressed.
     On the bright side, inflation is seen as modest, despite surging commodity
prices. According to China Commodity Prices index compiled by the Ministry of
Commerce, the headline CCPI stood at 140.34 earlier this month, the highest
since April, 2013. 
     "Rising prices have been due to supply constrain caused by reform; they are
not driven by demand, which has stayed flat, so a pickup in inflation is not a
concern to the policy-maker," Zhu said. CPI in 2017 rose 1.6%, decelerating from
the 2.0% gain seen in 2016, while PPI increased 6.3%, compared with a decline of
1.4% in 2016.
     But Zhu also cautioned that excessively tight monetary policy can also be
harmful. According to the PBOC's latest quarterly monetary policy report,
published in November, the average loan interest rate rose 49 basis points to
5.76% in the first three quarters in 2017, compared with an unchanged rate in
     In addition to hurting private businesses, higher borrowing costs may also
lead to a pick up in bad debt, therefore non-performing loans held by banks will
increase. Banks will step back from lending, further shrinking credit, which can
destabilize growth, Zhu noted.
     Zhu also argued for continued capital controls, even as China's FX reserves
rose by $21.5 billion to $3,161 billion in January, the 12th consecutive monthly
gain in the FX reserves level.
     "The additions to the forex reserve balance has been marginal, and there is
still enormous pent-up desire to move money out," Zhu said. Regulators may ease
some of the temporary curbs imposed last year to help arrest the yuan's
depreciation, but they will not let their guard down, he said. 
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--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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