Liquidity pledge as PBOC rejects strong stimulus

China's central bank said yesterday that it will not resort to strong stimulus to support the economy but will keep liquidity reasonably ample.

China’s central bank said yesterday that it will not resort to strong stimulus to support the economy but will keep liquidity reasonably ample and offer more help to companies which are having trouble obtaining financing.

Officials also reiterated that China will not use the yuan as a weapon to deal with trade frictions.

Policies will be made more forward looking, flexible and effective, the People’s Bank of China said in a statement issued at a briefing in Beijing.

Smaller companies, in particular, are having a tough time securing loans and are grappling with rising borrowing and operating costs, fueled in part by a lengthy official clampdown on riskier lending like shadow banking.

“For companies facing temporary difficulties, we encourage financial institutions not to cut off loans,” said Ji Zhihong, the head of the PBOC’s financial markets department, when asked about support measures for exporters impacted by rising trade protectionism.

“If the product has a market or future, we support banks to provide reasonable support.”

The PBOC said it will “effectively ease” companies’ financing problems and improve coordination with other agencies to ensure monetary policy measures are being transmitted into the broader economy.

Though it did not give details, analysts expect further cuts in corporate taxes and fees. The central bank has also specified that some funds freed up from reductions in banks’ reserve requirements should be earmarked for loans to smaller businesses.

PBOC Vice Governor Zhu Hexin also told the briefing that authorities will stay the course in their multi-year campaign to reduce risks in the financial system.

“The direction of structural deleveraging won’t change,” said Zhu.

The campaign is already paying dividends, with the macro-economic leverage ratio stabilizing and growth in the household debt ratio slowing, he added.

“The effectiveness of deleveraging needs to be improved. It’s the bad, inefficient leverage that needs to be gotten rid of. Some departments with high efficient leveraging can still add more debt.”

Analysts at Julius Baer agree Beijing is unlikely to repeat its large-scale stimulus of the past, predicting it will opt for a more measured response.

“We doubt that this (heavy spending) is in the government’s interest, as it is aware of the risk that its massive mountain of debt presents and will likely not want to jeopardize deleveraging and reform efforts made over the past two years,” they said in a note yesterday.

As for the recent fluctuations of the yuan exchange rate, Li Bo, a senior PBOC official, said at the press briefing that the yuan exchange rate is mainly decided by market supply and demand, and its flexibility has improved notably since last year.

“China will let the market play a bigger and more decisive role in exchange rate formation, and refrain from competitive currency devaluation and using the yuan exchange rate as a tool to cope with trade disputes,” said Li, adding that the country’s stable and positive economic fundamentals will provide strong support for the yuan.

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