By Kevin Yao
BEIJING (Reuters) - A Chinese central bank adviser said on Thursday he expects the government's financial deleveraging to be less forceful next year, a campaign that has weakened credit expansion at a time when the world's second-biggest economy is showing signs of slowing.
China is in its second year of a crackdown on speculative investment and high corporate debt levels as it looks to defuse financial risks and a property bubble.
But it walks a fine line - a dramatic clamp-down on financial risks could stunt economic growth. Factory output, fixed asset investment and retail sales last month all fell short of expectations.
"Currently, our financing deleveraging has achieved obvious results. Next year, we will continue to deleverage, but the deleveraging will not be as forceful as this year," central bank adviser Sheng Songcheng said at a finance forum in Beijing.
China's new loans slumped more than expected in October to their lowest in a year, the latest data from the central bank show.
Broad M2 money supply, which includes cash, and short- and long-term deposits, missed growth forecasts in October with a gain of 8.8 percent, expanding at the slowest pace since records began in 1996.
The central bank said in June that slowing M2 growth could be a "new normal" due to the crackdown on risky shadow lending activities.
"I expect M2 growth to pick up somewhat next year. It cannot be as low as this year," Sheng said.
Sheng expects China to maintain prudent monetary policy in 2018 and make appropriate fine-tuning based on economic and financial conditions.
NOT LETTING GUARD DOWN
China's total social financing (TSF), which includes off-balance sheet forms of financing such as loans from trust companies, bond sales and initial public offerings, slumped to 1.04 trillion yuan (£119 billion) in October from 1.82 trillion yuan in September, and indication the curbs are working.
Still, monetary authorities are not about to let their guard down.
Huang Qifan, deputy chairman of the economic and finance committee under the National People's Congress, China's largely rubber-stamp parliament, said the ratio of China's financial sector to the overall economy is the highest in the world.
"This is not a good thing," Huang told the finance forum on Thursday.
Central bank governor Zhou Xiaochuan warned last month that corporate debt levels are still relatively high and household debt is rising too quickly.
Central bank adviser Sheng on Thursday said he expects China to keep the yuan stable, with no sharp moves in either direction.
A rapid rise in the yuan could hurt China's economy while a dramatic fall could trigger some risks, he said.
The yuan could trade around 6.6 per dollar by the end of 2017, Sheng said. It started the year around 6.9 per dollar and has since made steady gains.
Sheng said he also expects market interest rates in China to fluctuate at high levels next year.
Huang said a property tax could be on the cards in the next few years, adding it will help temper speculation in a sector that has drawn a raft of government curbs in the past year.
China has discussed a recurring property tax for years, but public progress on the initiative ground to a halt after a very limited pilot scheme in 2011.
"I believe (a property tax) will happen in the near future, not take 10-20 years. It could happen in the next several years," he said.
Huang, appointed to his current post in February, is considered a leading financial expert in China and is best known for his term as mayor of Chongqing.
On Thursday, he also called for changes to how China manages its massive pile of foreign exchange reserves, which rose to $3.109 trillion in October.
"China has reached a stage where the foreign exchange reserves system must be reformed," Huang said, adding that the Ministry of Finance should play a bigger role in managing the country's foreign reserves.
The reserves are primarily managed by the People's Bank of China.
Huang said China's forex reserves can currently only be invested in liquid foreign debt, which generates low returns.
"We want to be a true financial power. To be a financial power, we should not lend more money to other countries, but invest globally and have high and sustainable returns."
(Reporting by Kevin Yao; Writing by Elias Glenn and Ryan Woo; Editing by Shri Navaratnam and Sam Holmes)