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Business / Economy

First LGFV default likely this year

By XIE YU/LI XIANG (China Daily) Updated: 2015-01-13 07:59

The low inflation level will offer the government greater room to stimulate the economy through monetary easing. The broad money supply will grow at 14 percent this year while the government's fiscal deficit will reach 3 percent of the GDP, both of which will probably exceed the government's target.

Economists said the chances of a financial crisis in China are still very small, though several areas need to be closely monitored. For example, a substantial reform of China's local government debt is crucial to reducing the economy's systemic risks.

A stronger central government in China will shift its focus to economic growth this year, after two years of intensive anti-corruption campaign, said Lu Ting, head of Greater China Economics, Global Research, Bank of America Merrill Lynch, on Monday.

Policymaking would be less constrained by political concerns this year, Lu said, with two years' preparation in the political sphere, Lu said in Hong Kong.

Monetary easing is expected to continue this year. With the end of the one-way appreciation of the yuan to the US dollar, the private sector tends to keep an increasingly larger share of their foreign exchange proceeds, depriving the central bank of the traditional source of base money supply and likely forcing the People's Bank of China to cut the reserve requirement ratio several times this year, he said.

With lower inflation, meanwhile, the central bank still has the room to cut benchmark deposit rate by 25 basis points and lending rates by 40 basis points this year.

Lu said reforms in other areas like clearing the local government finance vehicles are more important to reduce the funding costs for the real economy.

Bank of America Merrill Lynch predicts new bank loans could rise from 10 trillion yuan ($1.6 trillion) in 2014 to around 10.7 trillion yuan this year, with year-on-year loan growth slowing to 13 percent at end-2015 from 13.9 percent at end-2014.

The bull market propelled by liquidity will come to an end temporarily. But continued growth supported by companies' increased earnings is expected to form another wave of bullish performance, according to Swiss financial services firm UBS.

Chen Li, chief China strategist of UBS Securities, said: "In the short term, investment in infrastructure is likely to pick up in March and April this year, which is a result of expanded credit started in the fourth quarter of 2014. In the long run, the declining commodity prices will help with the increased profit margin of public companies, especially those in the manufacturing industry.

"As the central bank is expected to cut interest rate and required reserve ratio this year, companies' capital expenditure will go up again and lead to higher earnings. All these will help sustain the current bull market of A shares," he said.

Chen said that the lower interest rates and required reserve ratio will give momentum to the growth of banks and property companies.

Shi Jing in Shanghai contributed to this story.

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