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Easier monetary stance likely to remain

CHINA is likely to maintain a loose monetary policy for the rest of the year, economists said yesterday, citing the central bank's quarterly report.

The People's Bank of China pledged to maintain a moderately easy monetary policy and ensure ample liquidity in the financial system in its first-quarter monetary policy report on Wednesday.

"The comments have helped to quash speculation that monetary tightening may resume because of an excessive surge in lending during the first quarter," said Sherman Chan, a Moody's economist, yesterday.

Chinese banks ramped up lending early this year with government encouragement as the country attempted to revive growth amid a slowing economy. New loans in March topped 1.9 trillion yuan (US$220 billion), pushing the total in the first quarter to 4.58 trillion yuan.

Credit growth may have decelerated since the start of the second quarter as new loans in April were reported to slow to 600 billion yuan.

"Nevertheless, the central bank is still encouraging further bank lending, as much of the new funds benefited state-backed large projects. Small and medium enterprises are still struggling with liquidity and credit," Chan said.

The PBOC has specifically urged commercial banks to extend more credit to small businesses.

"The latest central bank report implies that the next rate adjustment is still more likely to be a cut," Chan said.

His view is echoed by Lu Zhengwei, Industrial Bank's senior economist who said "interest rate cuts can't be ruled out.'' He forecast "a spacious room" for the central bank to scale back the reserve requirement ratio.

The central bank has cut interest rates five times since September and eased the reserve requirement ratio four times as it tried to boost liquidity and trim lending costs.

The economists said the central bank may be less upbeat about China's economy than the central government. The PBOC voiced two main concerns - a fall in profit and income growth and the foundation of an economic recovery is not secure because private investment sentiment remains weak.


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