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February 6, 2017

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Prudent and neutral policy stays

CHINA’S monetary policy is expected to be more prudent and neutral, to rein in asset bubbles and guard against financial risks, economists have said.

The People’s Bank of China on Friday raised the interest rate for seven-day repurchase agreements, a key tool used to adjust monetary policy, and for longer 14 and 28-day repo rates.

In January, the PBOC also raised rates on its medium-term loan facility for the first time since it debuted the facility in 2014.

China has kept the prudent monetary policy since 2011. However, in practice the policy has been slightly easing for a period due to downward pressure on economic growth, according to Zhang Xiaohui, assistant governor of the PBOC.

Policy-makers said at the annual Central Economic Work Conference in December that China would maintain a “prudent and neutral” monetary policy in 2017.

In an article published on Friday in China Finance, a PBOC-run financial magazine, Zhang described the monetary policy for 2017 as “more neutral” and “more prudent.”

“China should keep its monetary policy prudent and stable, appropriately expand aggregate demand to avoid an overly-rapid economic slowdown and at the same time refrain from excessive money supply to prevent bubbles,” she said.

“The relatively easy monetary policy environment created by cuts to benchmark interest rates and reserve requirement ratios since late 2014 has changed,” said Lian Ping, chief economist at the Bank of Communications.

“Monetary policy is currently shifting toward prudence while tilting to slight tightening, a trend that has become more and more clear since the second half of 2016,” Lian added.

China International Capital Corporation, a Beijing-based investment bank, said that authorities were turning their focus to “curbing asset bubbles and guarding against economic and financial risks.”

At the Central Economic Work Conference in December, the Chinese leadership pledged to make a priority of preventing financial risks, saying that curbing asset bubbles would assume more importance in 2017.

The caution is justified by the property market, whose housing prices rose sharply in 2016, and changes to inflation.

China’s consumer price index, a main gauge of inflation, in December rose 2.1 percent year on year. But producer prices rose 5.5 percent, the highest in over five years, fanning inflation expectations.

However, analysts said policy-makers would take a gradual approach, given internal and external uncertainties in China’s economy, which needs to further consolidate.


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