MNI Policy: PBOC To Keep Liquidity Adequate Amid Deleveraging

     BEIJING (MNI) - The People's Bank of China (PBOC) will strike a balance

between pressing ahead with its deleveraging drive and ensuring a "reasonable

and adequate" supply of liquidity to the economy, Zhu Hexin, the newly-pointed

vice governor of the central bank said at a press conference on Tuesday.

     The following are the key points that were discussed:

     - Enhancing the monetary transmission mechanism: Zhu pointed to subdued

risk appetite among Chinese lenders and the poor creditworthiness of some firms

as key factors that are currently constraining the supply of liquidity to the

real economy. "Sometimes the financial system has money, but hardly lends it

out," Zhu said, explaining the slow pace of credit growth. To address this

issue, the PBOC will launch more credit-supportive policies (including via

greater use of relending and rediscounting tools), to encourage lenders to use

the capital unlocked via recent RRR cuts to increase SME lending.

     - Maintaining a 'reasonable and adequate' liquidity supply: Zhu noted that

the volume-weighted average rate of the benchmark seven-day repo traded in the

interbank market dropped to about 2.6% in mid-August from 2.9% at the end of

July, effectively functioning as a "rate cut" and indicating that liquidity

supply remains adequate. In turn, this is helping the Chinese economy to weather

a slowdown in domestic economic growth and is providing a cushion against the

negative impacts of the ongoing China-U.S. trade dispute, Zhu suggested.

     - Exchange rate support: Li Bo, director general of the PBOC's monetary

policy department, told reporters that the central bank has conducted

counter-cyclical management of the yuan when necessary. However, he emphasised

that overall, the exchange rate has become more flexible and is primarily driven

by economic fundamentals, which currently remain favourable.

     - Deleveraging campaign is generating results: Ji Zhihong, head of the

PBOC's financial market department, said that leverage ratios among companies

are declining and that the central bank is more closely scrutinising the

'invisible debt' of local governments. He added that household credit grew at a

slower pace in the second quarter. Reflecting these dynamics, China's overall

macroeconomic leverage ratio (debt as a share of GDP) eased to 248.90% by the

end of Q2, Ji noted.

--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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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