Monetary Policy Will Continue to Emphasize Deleveraging

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The Chinese central bank has indicated that the next phase of monetary policy will involve maintaining a delicate balance between deleveraging of the  market and ensuring an adequate level of liquidity.

On 12 May the People’s Bank of China released its Q1 Monetary Policy Implementation Report, which said that it would provide a “comparatively stable liquidity environment” in order to expedite stable growth, structural adjustments, market deleveraging, the suppression of asset bubbles and risk prevention.

Gui Haoming, chief economist of Shenwan Hongyuan Group, said to National Business Daily that this latest report places greater emphasis upon deleveraging measures and the prevention of asset bubbles than previous reports, which stressed maintenance of stable growth and satisfying the short-term needs of the economy.

The report will come as dour news for financial markets, given constrained liquidity is considered to be the culprit behind the recent poor performance of China’s stock and bond market.

According to Ren Zeping, chief economist of Founder Securities, the central bank should focus upon preventing tightened policy from triggering “reduplicated effects,” and deleveraging efforts aimed at reducing risk from becoming sources of systemic risk themselves.

Analysts in general expect the Chinese central bank to continue to maintain a stable and neutral policy stance, and maintain tightly balance liquidity levels.

Since the start of the year PBOC has made adjustments to the open market tools it employs, employing a mixture medium-term lending facilities (MLF) and pledged supplementary lending (PSL) in tandem reverse repos and temporary liquidity facilities (TLF).

PBOC has relied primarily on reverse repos and MLF, with the goal of maintaining basic liquidity by “cutting down the peaks and filling in the troughs.”

In response to widespread concerns about PBOC’s shrinking of its balance sheet in both February and March of this year, the report notes that asset reductions do not necessary mean tightening of the money supply.

For example while capital outflows will reduce squeeze balance sheets, they may actually result in an increase in money supply.

The report further reveals that in April the central bank balance sheet reversed the trend of the preceding two months and saw a net expansion.

 

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