November 12, 2019 / 2:52 AM / 25 days ago

China should cut rates, but not use monetary flooding: central bank adviser

SHANGHAI (Reuters) - Chinese policymakers should pursue a proactive fiscal policy and cut interest rates to support flagging economic growth, a financial magazine on Tuesday quoted Sheng Songcheng, an adviser to the People’s Bank of China (PBOC), as saying.

But as China does not face the same deflationary pressures that exist overseas, fiscal policy measures should be the first consideration, with monetary policy playing a supporting role, Yicai quoted Sheng as saying.

The comments comes as debate grows in financial market circles over whether China is moving quickly and forcefully enough to prevent a sharper economic slowdown.

Growth has cooled to near 30-year lows and is threatening to slide below 6%, while factory price deflation is deepening, which could further pressure industrial profits, investments and jobs.

However, consumer inflation has recently quickened to an almost eight-year high of 3.8%, and policymakers remain concerned about rising debt risks, posing a dilemma for the PBOC.

Sheng said a recent jump in pork prices “has certainly inhibited monetary policy, but core inflation and PPI (producer price inflation) remain on a downward trend.”

“Because of this, monetary policy shouldn’t be a flood, but there still is a need for structural adjustments.”

Sheng said that policymakers should pursue fiscal solutions as a priority, including front-loading the issuance of local government bonds to support infrastructure projects, and continued cuts to taxes and fees, a strategy it has pushed for two years.

Reuters reported in October that the southern province of Guangdong plans to use some of its 2020 bond issuance quota to issue debt as early as this month.

Rather than cutting reserve requirement ratios (RRRs) for banks, cutting the medium-term lending facility (MLF) rate or the loan prime rate (LPR) would be more helpful in lowering real financing costs, Sheng said.

The PBOC cut the one-year MLF rate last week by five basis points, the first such cut since early 2016. The loan prime rate will next be assessed on Nov 20.

It has also cut RRR seven times since early 2018, but data on Monday showed bank loan growth is not lifting off.

Analysts had widely penciled in RRR cuts each quarter this year {ECILT/CN], but some are now doubtful the next one will be announced in the current quarter given price pressures.

Sheng said that while another RRR cut cannot be ruled out, banks do not lack liquidity at the moment. He said that lowering real financing costs and increasing firms’ appetite for new borrowing should be policymakers’ priority.

China’s real estate controls are just right and should not be further tightened, Sheng said.

“In the past six months, real estate investment growth has continued to decline. If supply continues to be inhibited, it may not be possible to control housing prices as scheduled,” he said.

In July, a top decision-making body of the ruling Communist Party said the government will not use the property market as a form of short-term stimulus.

Reporting by Andrew Galbraith; Editing by Kim Coghill

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