MNI ANALYSIS: PBOC Highlights Main Tasks As Trade Concerns Up

--PBOC To Keep Ample Liquidity As Economic Pressures Pick Up

--PBOC To Guarantee Credit Availability To Real Economy

--PBOC To Stabilize The Yuan With Counter-Cyclical Measures

     BEIJING (MNI) - As the domestic push for growth loses steam, the People's

Bank of China has growing concerns over how external factors will impact the

economy, warning that the combined effects could hamper growth, according to the

Bank's latest monetary policy report (MPR).

     Differing from the May quarterly MPR, which expressed an "overall

optimistic" view of the global economy, the tone has seen a clear change this

time, stressing risks in "trade conflict acceleration", "global market

fragility" and "financial volatility in emerging markets".

     Domestic headwinds to the economy were also highlighted, including the fall

in infrastructure investment due to the curbing of local government debt and

shadow banking, the increasing exposure to credit risk which has discouraged

private investment and structural issues slowing long and medium-term growth.

     In the report, the PBOC advocated the coordination of different government

bodies, saying fiscal policy should play a more active role in expanding

domestic demand, whilst urging structural reform. While judging that inflation

will remain "under control", the central bank listed three main targets for

future policy operations.

     --AMPLE LIQUIDITY

     The latest MPR confirmed the loosening bias of the policy when compared to

the previous "neutral" stance. The report stressed the PBOC would conduct

"outlooking, flexible and effective" policy, provide an "appropriate monetary

and financial environment" and maintain a "reasonable and adequate" liquidity

scenario.

     According to the data from the report, the rate of excess reserves, the

lenders' reserve in excess of the requirement set by a central bank, have

rebounded to 1.7% as of the end of June, a higher level than seen in the past

three years, underlining ample interbank liquidity.

     However, it is too early to say the PBOC has turned to outright easing,

considering the deleveraging campaign has not been suspended -- at least not yet

-- but the report repeated the wording "liquidity floodgate" several times,

reiterating loosening at the proper pace.

     Since money market rates are largely lower than policy rates seen in the

PBOC's open market operations due to the loosing policy, chances further

downside in short-term rates are quite limited. We can see the PBOC has now

skipped its OMOs for seventeen days in a row, as they look to strengthen the

guidance of policy rates.

     --CREDIT AVALIBILITY

     The MPR warned the ample liquidity now has largely lodged inside the

interbank market or been invested in non-risk assets, considering the low risk

appetite of financial institutions not found its way into the real economy.

     The report reiterated the importance of increasing credit, saying "dredging

the transmission of monetary policy" to let the ample liquidity flow into the

credit system.

     According to the report, the average lending rate of non-financial

institutes as of the end of June stood at 5.97%, compared with 5.27% in

December, indicating the real economy is still suffering from tight credit, even

after the PBOC has flooded the market with liquidity.

     --YUAN STABLITY

     The MPR highlighted the stability of the yuan exchange rate, stressing

China will not conduct a "competitive devaluation" to cope with trade spats,

noting the PBOC has withdrawn from "regular intervention".

     But the central bank warned that it will mount counter-cyclical control if

"necessary", particularly when the market appears to have a "herd effect",

meaning the PBOC will not stay sidelined if the yuan sees a sharp depreciation

due to bearish sentiment and short-selling.

     The PBOC announced a reintroduction of the 20% reserve requirement on FX

forward purchases on Aug 3 after USDCNY rose to 6.89, and the move was seen as

an attempt to curb the yuan's sharp depreciation. Some analysts said this showed

the PBOC, no longer able to tolerate a turbulent market, had already activated

the so-called countercyclical measures.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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