PBOC will amplify support for areas in line with major strategies, weak links

China's monetary policymakers are set to further reduce financing costs and maintain ample liquidity, in support of the country's economic recovery that has gathered steam, said Pan Gongsheng, governor of the People's Bank of China, the nation's central bank.

Dedicated to safeguarding financial stability, the central bank will also provide liquidity support for some indebted local governments when necessary and prevent risks in the property market from spreading to other sectors, Pan said on Wednesday while addressing the Annual Conference of Financial Street Forum 2023 in Beijing.

Experts said that Pan's remarks underlined the central bank's intention to reinforce the improving recovery momentum. The PBOC may implement a cut in the reserve requirement ratio — the proportion of money that banks must keep as reserves — this month at the earliest, and another interest rate cut cannot be ruled out in the remainder of the year, they added.

China's economic momentum has strengthened recently with rallying production and consumption as well as an improving employment and inflation situation, Pan said, adding that the country is well on track to accomplish this year's GDP growth target of around 5 percent.

The central bank will keep interest rates at a level that can facilitate the economy achieving its potential growth rate as part of its countercyclical adjustments, Pan said. "Financing costs of the real economy will be lowered while maintaining an overall stable level."

The potential growth rate is the highest possible rate at which an economy can grow without triggering inflation, while operating at full employment.

Efforts will also be made to ensure a reasonably ample liquidity level, enhance the efficiency of existing loans and guard against overshooting risks of the yuan exchange rate, Pan said.

Lou Feipeng, a researcher at Postal Savings Bank of China, said that to ensure an ample liquidity level, an RRR cut is likely this month to meet the rising liquidity demand due to the issuance of a large amount of government bonds.

With the pressure imposed by a strong US dollar on the renminbi easing, an interest rate cut is also possible in the fourth quarter, said Charlie Zheng, chief economist at Samoyed Cloud Technology Group Holdings.

China's current economic growth is probably below its potential rate, meaning that there may be room for the central bank to reduce interest rates to boost growth, Zheng said.

But experts said any bold interest rate cut is unlikely as commercial banks are under pressure from falling interest revenues while the central bank is expected to avoid any excessive stimulus that could worsen long-term economic prospects.

"China's economy needs a reasonable growth rate, but achieving high-quality, sustainable development is even more important," Pan said, adding that the PBOC will amplify support for areas in line with major strategies and weak links in the economy, including technological innovation and small, private enterprises.

Pan's remarks echoed the central financial work conference last week, which called for creating an enabling monetary and financial environment and providing more high-quality financial services to major strategies, key areas and weak links, while stressing the need to forestall and defuse financial risks.

China's size of government debt is on the lower-middle end globally, Pan said, adding that the country has taken steps to promote the transition of local government financing vehicles into financially independent, sustainable enterprises that do not rely on government credit.

The central bank will provide regions facing relatively heavy debt burdens with emergency liquidity support when necessary, Pan said, which experts said will likely be launched in the form of a special purpose vehicle, a monetary policy tool.

Pan added that the country's property market correction has had a manageable impact on the financial system as real estate-related loans account for only 23 percent of the outstanding value of bank loans while property market transactions have improved since August.

The PBOC will work to prevent risks of the property market from rippling through other sectors, equally meet reasonable financing needs of real estate enterprises of different types of ownership and keep their key financial channels such as loans and bonds stable, he said.