REPEAT:MNI:China PBOC Q3 Policy Report Stresses Neutral Stance

Repeats Story Initially Transmitted at 05:09 GMT Nov 18/00:09 EST Nov 18

--Admits To Domestic Inflation Pressure but See Inflation Expectations Stable

     BEIJING (MNI) - The People's Bank of China's third quarter monetary policy

report released Friday stressed that the central bank will focus on improving

risk prevention while  maintaining stable overall banking system liquidity

conditions.

     The PBOC's assessment of the world economy in the third quarter generally

remained the same as in the second quarter. Growth prospects have improved while

there remain uncertainties and challenges, especially given the normalization

process of developed countries' monetary policies as well as strong pressure on

investment and consumption growth caused by high debt ratio and high leverage.

     Compared with the second quarter report, the PBOC admitted there may be

upward pressure on domestic inflation due to the government campaigns to cut

excess production capacity and reduce pollution. Still, it said inflation

expectations remain stable, the same comment as the second quarter report.

     The PBOC said it will improve its "two pillar" macro control framework,

which includes monetary policy and macro prudential policies. The report

highlights that asset markets, including real estate, have a natural tendency to

leverage up and so will likely fluctuate pro-cyclically. Macro prudential

policies are needed to adjust the leverage level to maintain financial stability

and prevent systemic risks.

     The third quarter report expanded on the second quarter report to detail

the areas where risks might occur, including corporate debt, asset quality and

bank liquidity, the real estate market, internet finance, cross-border capital

flows, as well as cross-industry and cross-market risks. The PBOC said it will

enhance its monitoring and regulation of those areas.

     The PBOC said he would continue to create a suitable monetary policy

environment for deleveraging while preventing financial risks.

     The PBOC said it would conduct Medium-term Lending Facilities (MLF)

operations once a month to fill medium- to long-term liquidity gaps, caused by

factors such banks' reserve requirement payments.

     The report also emphasized no matter how much and how long the PBOC drained

or injected liquidity into the banking system, the operations would only be

aimed at maintaining overall stable liquidity and should not be interpreted as

any change in the PBOC's monetary policy stance

     It is reasonable for interest rates to fluctuate in the short-term due to

the impact of seasonal or temporary factors, especially in the middle of the

month, the PBOC said. However, financial institutions must not roll over

overnight borrowing to meet long-term liquidity gaps or use short-term money to

leverage up, the PBOC warned, adding that financial institutions need to remain

alert to prevent liquidity risks.

     The PBOC also explained the reasoning for its new 63-day reverse repos,

which it started to use in its open market operations in late October. Because

of large tax payments due in October and large payments for purchases of Chinese

government bonds and local government bonds in October and November, and most of

the liquidity drained by these payments was unlikely to be released back into

the market until mid to late December, the 63-day reverse repos was used to

offset the liquidity impact, the report said. The 63-day reverse repo will also

lower the pressure on the PBOC to roll over short-term reverse repos and, when

they mature, can offset the fiscal spending impact expected at year-end. 

     The goal, the PBOC stressed again, is to maintain stable liquidity

conditions.

     The 63-day reverse repos can supply cross-quarter and cross-year money in

advance, helping to stabilize market expectations and liquidity conditions, the

PBOC added. Moreover, financial institutions who receive longer-term money will

be more likely to lend longer-term, which can optimize the term structure of

interest rates.

     The PBOC said its open market operations would continue to rely mainly on

its 7-day reverse repos, while flexibly injecting money by using reverse repos

with longer terms to maintain stable liquidity conditions.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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