(Yicai Global) Jan. 9 -- China's economy will falter in the first half of this year but surge in the second, according to the chief economist of American investment bank Morgan Stanley's China unit.

Consumer and business confidence are still falling and this could further slow down the Chinese economy, Xing Ziqiang said at a press briefing in Beijing yesterday. But the government has made clear that it will intensify counter-cyclical adjustments in finance, currency and foreign trade, judging by the signals delivered by policy changes this month, he added, saying this should lead to improvements in the second half.

Finance, currency and foreign trade are the primary areas where decision makers may adopt counter-cyclical measures, Xing believes, with financial policy becoming the backbone of China's 2019 strategy. Monetary policy will be supplementary and financial regulation will remain fairly cautious, he added.

Financial policy will come into play in two main ways, Xing said. He sees the government using it to boost business confidence by cutting taxes, and to stabilize infrastructure investment by increasing the deficit and issuing government bonds.

"Tax breaks are clearly necessary," he continued, pointing out the 16 percent value-added tax that many manufacturing firms must now pay -- a rate even higher than in South Korea, Japan and Vietnam. Lowering the rate by just two to three points could save businesses around CNY600 billion (USD87.8 billion), by Morgan Stanley's reckoning. 

Waning Infrastructure Investment

More intense regulations governing shadow banking are the major reason behind the rare decline in infrastructure investment, Xing believes, though a rebound in issuance of central and local special government bonds this year could help stabilize such investment.

The amount of local special bonds could easily increase to over CNY2 trillion (USD293 billion) this year, compared with CNY1.35 trillion in 2018, he added. Xing expects them to make up a one percentage point larger share of gross domestic product, which could boost infrastructure and fixed asset investment growth to a level consistent with nominal GDP growth. 

"The People's Bank of China's recent reserve requirement ratio cut supports business operations," Xing said on fiscal policy. "Banks are likely to be more willing to lend only if there is a sustainable source of low-cost funding. They may also use the freed up cash to buy bonds, including the local special ones, after the PBOC cuts the RRR further. This would stabilize aggregate private financing."

Morgan Stanley expects the central bank to the cut the RRR by another 300 basis points in 2019, after a 100 bip cut to begin the year. This would ensure gradual stabilization of private financing and broad money growth, leaving space for gains in property investments and financing, the financial services predicts.