China central bank to maintain 'prudent' monetary policy in 2015

[January 09, 2015]  BEIJING (Reuters) - The People's Bank of China will continue to maintain "prudent" monetary policy in 2015, keeping credit growth stable while having its hands free to fine-tune policy when necessary, the regulator said in an online statement on Friday.

However, the central bank said it would quicken the pace of market-oriented interest rate reform and push forward on increasing yuan convertibility in the capital account.

The People's Bank of China (PBOC) also said it would take steps to prevent systemic risks in the financial sector, a sign that regulators will maintain pressure on off-balance sheet lending and shadow banking.

China has made a series of moves to clamp down on shadow banking in recent months, including tighter regulations on the usage of bond market and interbank assets for refinancing.

The announcement reiterates the PBOC's commitment to stable monetary policy, even as speculation mounts that Beijing will have to take steps to boost growth and fend off deflationary pressures, in particular loosening monetary policy by cutting reserve requirement ratios (RRR) for banks.

BAD EXPERIENCE FROM 2009

But many economists believe the PBOC has resisted such calls because it fears that weak demand for loans from viable corporate borrowers means fresh liquidity will only be funneled into speculative ventures or help reinflate asset bubbles in property.

Analysts say the PBOC could take that view because of its experience in 2009, when stimulus spending caused widespread economic distortions.

A 50 basis point standard RRR cut would create an estimated 2.4 trillion yuan ($386.57 billion) in new funds after the money multiplier is applied.

Liu Ligang, China economist at ANZ in Hong Kong, has called for the central bank to cut RRR or otherwise inject more cash into the system.

He said that usually in an economy that's slowing firms do not see the need for fast investment and "may not want to borrow more".

"But China's case is a bit different," Liu said. "If you look at the last six years, firms have leveraged up quite a lot, previously bank loans were at quite high interest rates. If China can relax monetary policy further, firms could have a great incentive to borrow at a lower rate, and use them to pay off high-yield debt. Merely doing so will alleviate firms' financial burdens and also the risk of default."

($1 = 6.2085 Chinese yuan renminbi)

(Reporting by Shao Xiaoyi and Jason Subler; Writing by Pete Sweeney; Editing by Clarence Fernandez and Richard Borsuk)

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