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MNI ANALYSIS: PBOC Highlights Main Tasks As Trade Concerns Up

MNI (London)
--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
[TOPICS: MAQDS$,MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MGQ$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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