PBOC Signals Greater Resolve on Dovish Policy, Ample Liquidity

(Bloomberg) -- China’s central bank strengthened its commitment to supportive monetary policy and pledged to use multiple tools to ensure ample liquidity in the market, following a major fiscal package designed to reduce local debt risks.

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The People’s Bank of China will “resolutely insist on an accommodative monetary policy stance,” according to its quarterly monetary policy report published Friday. It will use programs including the newly established “outright reverse repurchase agreements” and government bond trading to keep liquidity reasonably sufficient, according to the report.

The PBOC’s latest guidance adds to a pledge by Governor Pan Gongsheng to maintain a loose policy stance, as the economy struggles with sluggish domestic demand and now faces fresh risks from the reelection of Donald Trump.

The central bank encouraged lenders to maintain “reasonable” credit growth, urging them to take advantage of policies promoting major construction projects as well as a trade-in program for consumer products. It will guide lenders to step up their support for startups to promote the country’s tech self-reliance.

Investors are watching closely for further signals on China’s economic policy direction, after Beijing on Friday unveiled a $1.4 trillion program to ease local governments’ debt crisis.

Starting in late September, officials have rolled out the boldest stimulus package since the pandemic. The economy showed some initial signs of improvement following measures including outsized cuts to interest rates.

What’s still unclear is just how far the government is willing to go to shore up sluggish demand and tackle deflation next year. Top leaders appear increasingly determined to shift China’s growth model and rely more on high-tech manufacturing to drive wealth creation.

The prospect of an expanded trade war during the US president-elect’s second term — even if it falls short of the threatened 60% tariff — is raising expectations for greater stimulus going into next year. China is facing a new era of protectionism that could put harsher constraints on exports, which have been a key source of growth since the pandemic.

The PBOC has already indicated it’s ready to ease monetary policy further, with a potential reduction of banks’ mandatory reserve ratio by 25 to 50 basis points by the end of the year. Lowering the requirement frees up money for banks to lend and invest.

Economists also expect the central bank to lower rates going into next year and allow the yuan to weaken to an extent, in order to offset potential obstacles to trade.

Yuan, Rates

In the report, the PBOC also said it would maintain the flexibility of the yuan exchange rate and step up its guidance for markets. It reiterated a pledge to avoid one-sided bets on the Chinese currency that could become self-fulfilling.

The PBOC additionally used the report to highlight problems in the transmission of monetary policy into the economy, including a deviation in banks’ loan and deposit rates from the official rates it sets.

While the cost of loans has declined much faster than the PBOC’s benchmark, deposit rates have failed to follow suit, partly due to weak borrowing demand and banks’ focus on boosting their savings stockpile, the PBOC said.

The central bank has already taken measures to correct the distortion that’s limited its policy room, according to the report.

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