Reuters/Beijing


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 yesterday.
However, the central bank said it would quicken the pace of market-oriented interest rate

reform and push forward on increasing yuan convertability 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.
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

funnelled 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 2.4tn yuan ($386.57bn) 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.”