Chinese Vice Premier Liu calls for more measures to support the economy

SHANGHAI (Reuters) – China's regulators are expected to boost their support for the economy and maintain significant liquidity in the financial system, Deputy Prime Minister Liu He said on Thursday, suggesting that Beijing will soon unveil more policies. to support growth in the face of increasing trade pressure in the United States.

Beijing has many political tools and is able to meet various challenges, said Liu at a financial forum in Shanghai.

Despite a series of supportive measures and a relaxation of policies since last year, the slowdown in the Chinese economy is still struggling to recover, and the l '. Sudden escalation of tensions between the United States and Sino last month raised fears of a real trade war that could trigger an economic crisis. global recession.

Liu's comments come one day after the data shows that credit growth in China was weaker than expected in May, bolstering market expectations that more monetary easing is needed. Factory activity contracted in May and imports fell the most in almost three years, highlighting weak demand.

"At the moment, we are experiencing some external pressures, but these external pressures will help us to strengthen our autonomy in innovation and accelerate development at a high speed," said Liu, chief negotiator for the states. United States and China. trade negotiations.

The government will put stronger measures in place to promote reforms and openness, Liu added.

The chairman of the People's Bank of China, Yi Gang, said last week that there was a "big" room for maneuver to adjust policies if the trade war worsened.

Quoting economists, the China Daily reported on Thursday that China should adjust its money supply and credit supply over the next few weeks, including reducing interest rates or reserve requirement ratios, to cope with "risk of deterioration" if trade tensions intensified.

We were already expecting further cuts to the banks' reserve requirement ratios (RRRs) this year, especially after the escalation of the trade dispute last month. Both parties have increased their tariffs on reciprocal products, and Washington is threatening more.

Last month, the PBOC stepped up its efforts to increase business loan and business growth by announcing a three-phase reduction in reserve requirements for regional banks to reduce the financing costs of small businesses and businesses. private.

Since the beginning of 2018, the RRR has increased six-fold since the RRR and has also led to a drop in short-term interest rates.

Unlike previous recessions, however, the central bank has so far been reluctant to reduce benchmark interest rates. Analysts believe that more aggressive measures have been adopted, fearing that such a measure is likely to result in a mountain of debt left by previous attempts to revive.

Sources told Reuters in February that the PBOC had considered reducing the reference rate as a last resort. But some analysts now estimate that one or more reductions would be likely if the trade dispute went out of control and the US Federal Reserve began to cut rates, giving the PBOC more leeway.

Some analysts believe that the chances of reaching a trade agreement are diminishing and that both parties seem to be showing signs. But US President Donald Trump has announced his intention to meet with his Chinese counterpart Xi Jinping at the G20 summit this month.

EXCHANGE RISK

More aggressive easing could also trigger capital outflows and increase pressure on the Chinese yuan.

The yuan has fallen nearly 3% since the surge in trade last month and is approaching $ 7 a dollar, a level that was last seen in the global financial crisis ten years ago. years.

"China is able and secure to maintain a stable foreign exchange market and maintain the fundamentally stable yuan at reasonable and balanced levels," said Pan Gongsheng, head of the State Administration of Foreign Exchange , at the forum.

The China Daily, quoting experts, said financial institutions faced tight liquidity in June and that the authorities wanted to accelerate credit growth to meet economic growth targets.

Beijing has set a growth target of about 6% to 6.5% for this year, rising from 6.6% in 2018, the slowest rate of expansion recorded by the country in nearly 30 years.

Bank of America Merrill Lynch analysts estimate that China's GDP growth could fall to 5.8 percent this year and 5.6 percent in 2020 if the trade war intensifies, and expects to what Beijing is responding to with four benchmark rate cuts, more RRR cuts, consumer subsidies and employment stabilization measures.

On Monday, the government announced measures to give local governments greater flexibility in financing so they can increase spending on infrastructure, a key element of the economic stimulus package that has not revived. investments as quickly as expected by some Chinese observers.

The escalation of the trade war has exceeded tariffs, as the two countries are getting more and more pressure to give ground.

Chinese state media warned that Beijing could use rare earth for its next strike. The United States relies on China to supply rare earths to manufacture a multitude of high-tech products.

China is also the main holder of the US public debt, with about 1.12 trillion US dollars in US Treasury bonds, which suggests that Beijing could start selling US bonds.

China is a responsible investor in global financial markets, said Pan.