MNI INTERVIEW1: Trade Truce Enough to Bolster China H2: Ma Jun

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LONDON (MNI) – The U.S.-China trade ceasefire should largely rule out any need for major new economic stimulus measures in the second half of the year to maintain Chinese growth within the targeted range, according to Ma Jun, member of the People’s Bank of China Monetary Policy Committee, in an exclusive interview with MNI.

The PBOC’s former chief economist expressed his optimistic outlook following the weekend agreement between the America and China’s leaders at the G20 in Japan for trade talks to resume. Ma said the expectation that there would be no further escalation in the trade conflict underlined his belief that Beijing would have little need to go beyond existing economic stimulus measures to sustain the required rate of growth.

“The consensus reached by President Xi and Trump during the G20 Summit has delivered an important and positive certainty (to China and global economy),” Ma said. “We are confident that China’s economy is likely to keep above 6% GDP growth and below the 5.5% surveyed unemployment rate without major new stimulus policies as long as the trade war would not escalate in H2.”

Ma believes that the agreement to restart trade negotiations has led to market expectations that a deal would include the rolling back of some and perhaps all of the tariffs so far imposed on Chinese imports by Washington DC. According to Ma’s model, if the US were to cut its 25% tariff applied to USD250 billion worth of Chinese goods to 10%, China’s GDP growth would be boosted by 0.3 percentage point.

Meanwhile, the PBOC’s efforts to reduce funding costs will work to bolster the economy, Ma said, stressing the importance of the current, lower, short-term money market rates in placing effective downward pressure on corporate lending rates.

Moreover, in Ma’s view, Beijing’s large-scale tax cuts have boosted the profit outlook for companies and provided another drive for the growth. He cautioned against any further big tax giveaways which he did not think were appropriate as “local government fiscal balance would be under stress if fiscal revenue falls too much.”

 

LIMITED SCOPE FOR EM EASING

Ma conceded that the potential dovish turn in the policy direction of the world’s major central banks does grant additional room for easing in the emerging countries.

“However, the easing has limits, considering the currencies of emerging economies would depreciate and the leverage ratio would rise, particularly if the pace of EM easing was faster than that of advanced countries,” Ma warned.

“As we all know, a high leverage ratio will generate medium-term financial risks, so I would caution against excessive monetary easing which would lead to a jump in the leverage ratio.”

He also argued that it would be hard to measure the net benefits to the real economy from monetary easing as it might fall short of offsetting the upward pressure on funding costs from increased credit risk amid a slowing economy.

 

INTEREST RATE REFORM

Turning to the long-awaited reform to simplify and fuse China’s dual interest rate tracks, Ma thinks the motivation for the PBOC to push on with reform in the short term is increasing.

“One purpose of the reform is guiding the fall of lending rates. Now, although the short-term market rates drop, the long-term lending side has not seen a corresponding fall as the market rates and the lending rate are poorly linked,” Ma said.

Ma expects that the future trajectory of market-based interest rate reform would include “removal of the benchmark lending rate, clarifying only one short- or medium-term rate as the policy rate, and strengthen the linkage of the loan prime rate (LPR) with the policy rate.”

But Ma acknowledged that the reduction of funding costs for SMEs in China should be achieved with a combination of solutions, including the above-mentioned interest rate reform, government guarantees for SME lending, greater transparency of SMEs’ financial data, and wider application of Fintech.

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