China's PBOC flags stimulus restraint but says policy should be flexible

Nelson Ching | Bloomberg | Getty Images

China's central bank won't resort to excessive stimulus to bolster growth but will keep a flexible stance in the event of an economic shock - domestic or global, Governor Zhou Xiaochuan said while reiterating the authority's prudent monetary policy.

Under the banner of prudent policy, the Chinese central bank has cut interest rates six times since November 2014 and has also reduced the amount of cash that commercial lenders must hold as reserves. The last policy easing was on Feb. 29 when the People's Bank of China (PBOC) lowered the reserve requirement ratio.

The central bank is trying to keep liquidity flush to support an economy undergoing the most significant structural reforms in two decades. But officials, including Zhou, have warned against excessive policy loosening that could intensify downward pressure on the yuan and spur capital outflows.

"The current monetary policy is prudent with a slight loosening bias," Zhou told to reporters at a scheduled news conference in Beijing on Saturday on the sidelines of the annual parliament session.

"We also want to stress that monetary policy should be adjusted dynamically depending on the judgment towards the economic situation," he added.

Zhou outlined the PBOC's five monetary policy stances as "loose", "appropriately loose", "prudent", "appropriately tight" and "tight", with flexibility on either side of each. China adopted an "appropriately loose" policy after the 2008 global crisis before shifting to a "prudent" stance in 2011.

"We would adjust our monetary policy on a real-time basis. If there are big changes in the domestic and global environment, we will keep the flexibility in monetary policy to counter shocks," Zhou said.

Central banks in Europe and Japan have resorted to negative interest rates in attempts to stimulate consumer demand and stoke worryingly low inflation. But the strategy has increased volatility in the financial markets and raised the specter of competitive currency devaluation.

Zhou said China does not need to use currency policy to boost trade, reaffirming Beijing's stance that it will not rely on yuan depreciation to drive exports.

Jin Zhongxia, executive director for China on the International Monetary Fund's policymaking board, said at a conference in New Delhi on Saturday he did not expect a "very dramatic" depreciation of yuan.

Economic pulse

Yi Gang, a vice central bank governor, told the same briefing that he expected China to achieve its annual economic growth target this year.

The government has set a growth target of 6.5 percent to 7 percent for in 2016. The world's second-largest economy expanded 6.9 percent in 2015, its slowest pace in 25 years.

"It's not necessary to take excessive stimulus to achieve the (growth) target," Zhou said.

Rapidly easier credit conditions could also stoke the country's property market, which is showing signs of heat in the big cities, and put upward pressure on consumer inflation.

Banks have followed the central bank's cues, slowing their lending from January's record splurge, central bank data released on Friday showed.

Net new yuan-denominated loans fell to 726.6 billion yuan ($111.80 billion) from 2.51 trillion yuan a month earlier and significantly undershot economists' expectations of 1.2 trillion yuan.

Meanwhile, data released on Saturday showed continuing weakness in other key parts of the economy.

China's manufacturing output in January and February grew at its weakest pace since 2008, according to data released by the National Bureau of Statistics.

Retail sales, a gauge of domestic consumption, rose at the slowest rate since May 2015.

However, fixed-asset investment, a crucial driver of the economy, gained 10.2 percent in the first two months from a year earlier.

"Fixed-asset investment growth picked up due to stronger real estate investment," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

"The economy still needs support from loose monetary policy and expansionary fiscal policy going forward. Apart from the expansion of the (budget) deficit to implement tax cuts, the central government needs to maintain infrastructure investment."

Housing overhang

Despite the pickup in property investment, Zhou said on Saturday that China's housing market on the whole is facing major oversupply issues.

His comments are in line with the government's willingness to tolerate urging prices in the country's biggest metropolises as Beijing takes steps to flush out a huge inventory overhang in smaller cities.

To boost the housing market, China has cut downpayments for first- and second-time home buyers and lowered transaction taxes for some home buyers.

In contrast, authorities in China's biggest cities have already announced measures to cool their markets in response to strong sales and prices, state media reported this month, citing Housing Minister Chen Zhenggao.

Prices in the southern industrial city of Shenzhen surged nearly 52 percent in January from a year earlier.

"Banks should also make their own judgment to review clients' ability to pay and their financial risks," Zhou cautioned.