Central bank swears by stable monetary policy

Coordination on macro issues in the offing; local scene to shape decisions

China's central bank has assured its monetary policy will remain stable and be decided by domestic situations.

Key officials said on Tuesday the People's Bank of China will also promote international coordination on macro policies to facilitate global economic recovery from the impacts of the COVID-19 pandemic.

China, they said, will maintain a normal monetary policy as well as independence in decision-making.

The country will also seek to strike a balance between internal and external institutions, said Sun Guofeng, head of the PBOC's monetary policy department.

Monetary measures will consider the domestic economic growth rate and the price level. The central bank will also keep a close eye on changes in the global economy and global finance, Sun said.

Any possible rate adjustments by the US Federal Reserve will likely have only limited impacts on China's financial markets, he said.

Sun called the recent rise in factory gate prices, as indicated by the producer price index (PPI), a "periodical" phenomenon occurring due to the low statistical base of 2020 and the surge in prices of imported commodities.

After peaking in the second and third quarters, China's PPI is likely to drop in the fourth quarter this year, potentially dragging down the full-year figure for this year, Sun said.

Last week, the PBOC announced it will lower almost all financial institutions' reserve requirement ratio by 50 basis points, effective Thursday.

PBOC officials called the ratio cut a normal move as the monetary policy has returned to the pre-pandemic status in the first half of this year. The 50 basis points RRR cut should not be construed as a sign of change in the prudent monetary policy tone, they said.

"Policymakers reiterated that stability remains the theme of the monetary policy," said Christina Zhu, an economist at Moody's Analytics.

Total liquidity in the banking system will remain reasonable and adequate. And authorities will continue using targeted measures to ensure the funds will continue to flow into vulnerable sectors and small and medium-sized enterprises, Zhu said.

The PBOC said part of the funds released through the RRR cut will be used to repay 400 billion yuan of medium-term lending facility, or MLF, and to prepare financial institutions for the liquidity gap during the tax payment period later this month.

Commenting on that plan, Zhu said, "Thus, the net injection isn't as big as it looks."

China may need another RRR cut in the fourth quarter, if banks are unable to provide loans to solid companies due to constraints of capital and liquidity, said Iris Pang, an economist with ING Bank.

In the first six months, China's financial institutions increased RMB-denominated loans and stock financing to the real economy. The RMB loans rose by 613.5 billion yuan compared with the same period in 2020, and nonfinancial companies' stock financing reached 495.5 billion yuan, up by 249.4 billion year-on-year, said Ruan Jianhong, head of the PBOC's statistics and analysis department, at a news conference on Tuesday.

Lu Ting, chief economist with Nomura Securities, said he expected the growth of outstanding total social financing to rise slightly in July and to stand at above 11 percent year-on-year in the subsequent months, thanks to the RRR cut and likely faster government bond financing.