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April 26, 2019

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PBOC to stay neutral on monetary policy

China’s central bank reaffirmed it would maintain a neutral monetary policy, with no plans to tighten or relax its stance.

The remarks came a day after the central bank extended 267.4 billion yuan (US$39.8 billion) to some commercial banks through its targeted medium-term lending facility.

Introduced in December, the TMLF is a new lending measure which aims to encourage domestic lenders to increase their funding to small and private firms. This is the second time the tool has been used this year.

In response to market rumors and speculation about a loosening bias, central bank Vice Governor Liu Guoqiang said the TMLF move did not signal that the general direction of monetary policy has changed. It was only a short-term liquidity adjustment.

Liu said the central bank would stem the flood of money into the economy and maintain reasonable and sufficient liquidity by flexible monetary policy tools to create a favorable monetary and financial environment for small and micro enterprises.

To boost loans to private and small companies, the bank will expand credit quotas for measures like relending and rediscount and establish a policy framework to allow a lower deposit reserve ratio for small and medium-sized banks.

Outstanding loans to small and micro firms extended by the top five state-owned commercial banks are expected to increase by more than 30 percent year on year this year, cutting the comprehensive financing cost of these companies by about 1 percentage point.

The central bank’s Monetary Policy Department director Sun Guofeng said current monetary policy was “overall appropriate,” neither tight nor loose and China will maintain its structural deleveraging.

Earlier this week, it was widely rumored in the market that the central bank would cut the targeted reserve requirement ratio by 1 percentage point for some rural financial institutions starting yesterday.

As for this, the Japanese investment bank Nomura said in its recent research note that the chance of either RRR cuts or targeted RRR cuts in the near term “gets smaller” after the TMLF operation.

It was also unlikely for China to tighten liquidity yet, as the country needs to stabilize growth, accommodate a proactive fiscal policy and provide cheaper financing to the private sector, the report said.


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