China Press Digest: Thursday, July 27

     BEIJING (MNI) - The following are highlights from the China press for

Thursday, July 27:

     Regulators could consider setting up a new multilevel reserve requirement

system to reduce pressure on liquidity and avoid the negative effects of the

current reserve requirement system, Zong Liang, chief economist at Bank of

China, said in a commentary published Thursday in the Financial News, a journal

run by the People's Bank of China. Zong suggested China could have two levels of

deposit reserve requirement, a legally required minimum deposit reserve ratio of

7% and a voluntary adjusted one with a ratio of 10%. Commercial banks could

borrow from the central bank using the additional adjusted reserve requirement

money stored at the central bank as collateral, Zong said. Monetary policy

should focus on guiding market expectations and deleveraging at a moderate and

stable pace in the second half of this year. The central bank should increase

its injections of medium- and long-term capital via the Medium-term Lending

Facility, particularly as regulations tighten and key macro-prudential

assessments occur, Zong noted. Deleveraging the real economy is the key and

macroeconomic policy needs to balance deleveraging with liquidity stability,

Zong added. (Financial News)

     Capital outflows, rather than high debt ratios, are likely to be the

biggest source of systemic risks in China in the period ahead, Yu Yongding, a

researcher with the Chinese Academy of Social Sciences and a former member of

the PBOC's Monetary Policy Committee, said Wednesday in an interview with Caixin

Magazine. China's international payment balance sheet contains large net errors

and omissions since a large amount of illegal capital fight has not been

recorded, Yu argued. Although capital outflows have slowed as the yuan exchange

rate has stabilized, some companies still have strong intentions to purchase

foreign exchange, Yu warned. Recent policies show regulators have noticed the

damage caused by capital fight, Yu noted. (Caixin Magazine)

     The banking sector's bad loan ratio is likely to rise as the economy slows

and overcapacity cuts accelerate in the second half of this year, the Shanghai

Securities News reported Thursday, citing a research note from the Industrial

and Commercial Bank's Financial Research Institution. Banks will continue

suffering operational pressures as their access to credit shrinks and their

traditional loan demand declines, the report said. The volatility of capital

availability will rise, which could cause liquidity shocks for certain medium-

and small-size banks. Rising fund-raising costs in both the credit and bond

markets could hurt the real economy, the report warned. The ICBC research group

predicts full-year GDP growth will be around 6.8% on average, the report added.

(Shanghai Securities News)

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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