The People's Bank of China, the central bank, will continue with its "prudent" monetary policy inthe second half of the year, but may consider more easing measures to provide sufficient liquidityin the financial market and ensure adequate capital for government-led investment programs.
The central bank said it would adopt a more flexible approach, use various policy tools and takenecessary fine-tuning steps, said a PBOC statement after a meeting attended by Governor ZhouXiaochuan and branch heads in Beijing on Wednesday.
The main task for the ensuing months is "to maintain appropriate liquidity and achievereasonable credit growth, and to lower borrowing costs and support key areas and vulnerablesectors", it said.
The central bank's statement follows comments made after a meeting of the Political Bureau ofthe Communist Party of China Central Committee on Thursday, in which President Xi Jinpingstressed on the need for a prudent monetary policy to provide proper liquidity to the realeconomy.
Wang Tao, chief economist in China at Swiss financial services provider UBS AG, said thepolicy tone may involve additional rate cuts, with the next move likely toward the end of the thirdquarter, and proactive liquidity provisions.
"We don't see a pork-driven rebound in the Consumer Price Index as an upcoming impedimentto monetary easing, as the sluggish economy in general will likely prevent any undesirable surgein inflation. Indeed, a modest degree of reflation at this stage would likely be welcomed to dispeldeflationary pressures and stabilize China's debt cycle," said Wang.
It also means the possibility of an increased use of the Pledged Supplementary Lending facilityto augment lending support to Public-Private-Partnership and key infrastructure projects, shesaid.
The PSL is a collateralized form of on-lending facility, which allows the PBOC to improve creditallocation through targeted liquidity provision. China Development Bank, the policy bank, hasreceived the PSL since April 2014.
The PBOC announced on Monday that in July, it provided PSL of 42.9 billion yuan ($6.9 billion) tothe CDB at an interest rate of 2.85 percent, lower than 3.1 percent in June. The PSL loan is tosupport shantytown renovation projects, said the central bank.
The central bank cut the benchmarket interest rates three times along with two cuts of the RRR inthe first six months.
Qu Hongbin, chief economist in China at HSBC Holdings Plc, said that the monetary easing inconjunction with a more proactive fiscal policy will help generate a recovery in investment growthin the coming months.
He forecast an additional 25 basis points cut in the benchmark interest rates and a 200 basispoints cut in the reserve requirement ratio during the second half, to strengthen the recovery ineconomic growth.
The growth in fixed-asset investment, which used to be the strongest engine that drove theworld's second-largest economy, decelerated to a decade low of 11.4 percent year-on-year inJune. Infrastructure investment grew by just 19 percent year-on-year in the first half, comparedwith 23 percent in the same period of last year.
The slowdown was mainly because of the high borrowing costs, which are even higher than thereturns on underlying projects, said Qu.
"China's near-term growth driver will shift back toward infrastructure investment from exports andmanufacturing investment."
In addition, a structural slowdown in foreign exchange inflows will push down the amount of cashthat should be reserved by financial institutions, he said.
The central bank's statement also highlighted that it will keep the yuan "basically stable", as thepolicymakers suggested a further widening of the currency's trading band last month to supportexports.
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