How will monetary and fiscal policies work together in the coming 2020? What encouraging changes the economy may usher in? What are the possible risks? Focusing on these issues, the reporter (hereinafter referred to as NBD) interviewed Dr. Wang Tao, chief China economist and chief economics researcher of Asia at UBS Investment Bank.

 

Wang Tao is resident in Hong Kong, China, and was formerly head of economic research and strategy at Bank of America Greater China and head of Asian economic research at BP Group, focusing on research on macroeconomic development, monetary policy, exchange rate trends, and energy market development.

 

Prior to Bank of America, Wang Tao was a senior economist at the International Monetary Fund (IMF), where he was responsible for studying China's macroeconomic development and structural reforms. During his 8 years in the IMF, Dr. Wang has participated in many project negotiations and annual consultation meetings with IMF member countries, and has published a number of research papers. She has also been the Chief Asian Economist at DRI / McGraw-Hill (now Global Insight). Dr. Tao Wang ranked first in the field of macroeconomic research in the 2017 Institutional Investor Survey.

 

There is room for loosening monetary policy

 

NBD: Some analysts believe that deflation in China's manufacturing industry continues to increase. What is the current UBS outlook for the Chinese economy in 2020?

 

Wang Tao: We judge that China's economic growth rate in 2020 should be around 6%, which is basically stable with 2019. Business confidence is expected to improve, thereby preventing investment from continuing to decline, and the impact on the labor market may also weaken, thereby supporting consumption. November economic data also showed signs of a rebound. With the issuance of special bonds by local governments, and funds will be available in early 2020, we expect that from now until the second quarter of 2020, the momentum of economic activity's sequential growth may improve. By the third and fourth quarter of 2020, with the slowdown of real estate activities, the momentum of economic growth may have eased.

 

On the policy side, stable growth is still very important. We believe that the policy in 2020 is still slightly loose, and restrictions in some areas may be loosened slightly, but no large-scale stimulus policy will be introduced. We believe that the government can also tolerate an economic growth rate of less than 6%.

 

NBD: Recently, the central bank frequently released easing signals. For example, on November 5, the MLF interest rate was reduced by 5 basis points; on November 18, the 7-day reverse repo rate of the central bank's open market was lowered for the first time in more than 4 years (from 2.55% (Reduced to 2.5%); on November 20, the prices of the two major LPR varieties were all reduced. In addition, there have been many reductions in 2019. These seem to be releasing signals that loosening is expected to be further coded. What is your judgment on the monetary policy of 2020?

 

Wang Tao: We believe that there may be some room for loosening monetary policy in 2020, but it is also unlikely that a substantial "water release" will be made. In other words, a sound monetary policy will be maintained, but some liquidity may increase supply in the course of soundness.

 

At present, the economy is showing signs of rebound, and the CPI is still climbing, so we don't think it will be lowered in 2019. By 2020, the central bank should still provide sufficient liquidity to the market. We believe that there will be a 50-100 basis point reduction in the year, which will promote a moderate rebound in overall credit growth. In early 2020, open market instruments may be mainly used to ensure liquidity during the Spring Festival; after the CPI falls in the second quarter of 2020, MLF interest rates may also be reduced by 10-15 basis points.

 

RMB exchange rate is expected to stabilize

 

NBD: Recently the market has paid more attention to special debt. According to media reports, the Ministry of Finance has issued some additional special debt quotas to the provincial finance department in 2020. The executive meeting of the State Council on September 4 also requested that the issuance of special bonds for local governments be expedited. How do you expect infrastructure investment to grow in 2020?

 

Wang Tao: Fiscal expenditure will not be great in 2020, but we expect to focus more on supporting infrastructure, including increasing the scale of infrastructure financing. A large part of infrastructure financing will come from local special debt. We expect that the total amount of local special debt may be 3 trillion yuan or more in 2020, and 2.15 trillion yuan in 2019, which means that in 2020 it is expected to increase by about 850 billion yuan over 2019, and more than half of this may be used for support Infrastructure projects. In 2019, the government has issued an additional quota of 1 trillion yuan in advance. We believe that in the next 1 to 2 months, we may see newly issued bonds. This part of the funds will be allocated to the project in the first quarter of 2020. At the same time, more local special bonds will be used as project capital in 2020, and the financing restrictions on local platforms may be slightly relaxed, which can increase the hidden financing of local governments and help achieve 6% of infrastructure investment in 2020 ~ 8% growth.

 

The growth rate of infrastructure in 2020 will be significantly higher than that in 2019, and it will also become an important driver of "steady growth". However, infrastructure construction involves many sub-sectors, and we don't expect much growth in high-speed rail, because the railway network has already been laid out almost. However, rail transit, such as subways in some cities, and urban agglomerations such as Beijing-Tianjin-Hebei integrated rail transit, will continue to develop. In addition, municipal pipeline networks, urban parking lots, cold chain logistics, energy conservation and environmental protection, and clean energy may also be investment priorities.

 

NBD: How do you judge the trend of the RMB exchange rate in 2020? Will the pressure of devaluation increase?

 

Wang Tao: We feel that the RMB exchange rate “breaking 7” is a good thing on a psychological level, which has broken people's solidified cognition of “breaking 7”. We believe that the exchange rate of RMB to USD may fluctuate around “7” in 2020, but it also depends on the exchange rate trend of a series of currencies such as the USD to the Euro.

 

Looking forward, the stabilization of the RMB exchange rate and the further opening of the domestic market in the next two years should help attract more foreign capital inflows. Therefore, under this benchmark assumption, we expect the RMB to USD exchange rate to remain within "7" (about 6.95) at the end of 2019, and fluctuate around "7" from 2020 to 2021.

 

Breaking the rigid exchange is an important part of the reform

 

NBD: The Fed has cut interest rates many times since 2019. Do you expect the Fed to continue cutting interest rates in 2020?

 

Wang Tao: The UBS US team made relevant predictions, expecting that the US Federal Reserve will cut interest rates three times in the first half of 2020. From the third quarter of 2020, the US economy will stabilize and recover.

 

NBD: In recent years, policies have accelerated the pace of domestic capital market reform and opening up. For example, recently, the State Council issued an opinion on further improving the use of foreign capital, and will comprehensively lift restrictions on the business scope of foreign banks, securities companies, fund management companies and other financial institutions in China. In 2020, the restrictions on foreign-invested shares of securities companies, securities investment fund management companies, futures companies, and life insurance companies will not be lifted. UBS Securities, a subsidiary of UBS, is already the first foreign-invested securities broker in China. Can you evaluate what aspects of the current capital market reform need to pay attention to and improve?

 

Wang Tao: The proportion of domestic direct financing will continue to increase, which is the general trend. But direct financing is not only about equity, but also bonds. In fact, the development of bonds will be faster than equity.

 

Capital market reform requires more than reforming the capital market. The core of the development of the capital market is that it can help to allocate resources effectively, so we must respect market mechanisms and let the market play a leading role. This is not only the market pricing, but also the market clearing mechanism, which is to break the rigid payment.

 

Breaking the exchange rate is an important part of the capital market, the financial system, or the reform of state-owned enterprises and banking systems. This is also what I said. Capital market reform should not be limited to the capital market itself.