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MNI Interview with Prof. Huang Yiping


China could inject capital into its banking system and accelerate the disposal of bad loans made under emergency Covid aid programs even as the economy returns to trend growth rates, Huang Yiping, deputy dean of National School of Development at Peking University and former member of the People's Bank of China's monetary policy committee told MNI. Such a move could mirror action taken in the 1990s when state-owned asset management companies were established to take over the bad loans of the four big banks, Huang said in an interview.

Chinese banks disposed of a record CNY3.02 trillion in non-performing loans last year, according to the China Banking and Insurance Regulatory Commission, adding that it expected the effort to continue in 2021.

While the government has provided no indication that it will bail out struggling lenders which have shouldered the task of supporting the economy, Huang said the PBOC will provide ample liquidity as they focus on cleaning up balance sheets and rebuilding capital.

The central bank will also ensure continued monetary policy support for what has been an uneven economic recovery, even if additional measures will be modest following its response last year to the unprecedented blow from the Covid-19 pandemic, said Huang.


Wary of financial risk even amid last year's disruption, during which it maintained its neutral "prudent" monetary policy stance, the PBOC will continue to monitor debt levels and the rising asset prices, said Huang, pointing to a surge in house prices in some cities as a particular cause for concern. In the longer run, the central bank may tighten policy in order to tackle high leverage, the economist said.

"The rapid rise in housing prices could generate financial risks. High asset prices will also divert financial resources, weakening support for investment and the real economy and weighing on the recovery," said Huang.

But in the short term, tougher property market regulations national wide could hurt growth, he noted. He suggested that some cities could instead introduce prudential measures this year, such as raising mortgage rates or increasing

downpayment requirements to cool activity.

China's economic growth could return to its trend 6% this year, discounting base effects from last year's disruptions, he said, noting that even in the absence of a formal growth target, officials aim to keep the economy expanding at about this rate. But consumption is still sluggish and manufacturing investment soft.

As the authorities address excess leverage in parts of the economy, the government is likely to allow some state-owned enterprises to fail, but it will avoid widespread defaults which could prompt systemic effects, Huang said, noting that the public sector has plenty of profitable assets as well.

China's capital account should be largely convertible by 2025, with less intervention in the yuan exchange rate and only limited restrictions retained in order to safeguard financial stability, Huang told MNI.

Controls on interest rates, fund allocation and cross border capital flows should be reduced as China also pursues a policy of promoting international use of the yuan.

The PBOC is already cautious of direct intervention in the currency's managed float, and has indicated tolerance for a wider trading band, particularly for yuan appreciation. While it is not possible to say it will never intervene again, Huang said the policy preference for a weaker yuan is gradually shifting as the financial sector and capital markets become more prominent in what has long been an export-oriented economy.

A stronger currency would benefit China, he said, although this shift is only at an early stage.


A more flexible stance on foreign exchange policy will also be positive for yuan internationalisation. More steps are likely in coming years to encourage investors to hold yuan-denominated stocks and bonds, Huang said, adding that while authorities may loosen regulations on capital flows, some restrictions will continue to be required to guard against risks to financial stability.

Moves already under way to liberalise China's markets and state-owned companies will not only be positive in themselves but should also help as China reengages with the U.S. under President Joe Biden, Huang said.

A more conventional U.S. administration will have pros and cons for China. While its behavior may be more predictable, it is also likely to seek to gather its allies to confront Beijing.

"It seems the Biden government will continue some of the policies adopted by the previous administration," Huang said, noting that the Phase One U.S.-China trade deal signed under President Donald Trump is still valid and that Biden has shown little sign of wanting to quickly reduce tariffs on Chinese goods. But the two countries can work together in areas such as WTO reform and climate change.

Negotiations for a more ambitious Phase Two trade deal are unlikely to start this year, given China's place in Biden's priorities, Huang said, adding that while he is now less optimistic of a big improvement in bilateral relations, he expects communications to be more fluid.


From: MNI 2021-02-02