Policy banks focus of meeting

Chinese policy banks could play a bigger role in launching supportive measures to stabilize the economy in coordination with prudent monetary policy and proactive fiscal measures, according to analysts.

A meeting on Sunday of the State Council's Office of Financial Stability and Development Committee-the country's top financial regulatory body-highlighted efforts to further reform the policy banks and improve their governance mechanism to step up countercyclical measures and spur economic growth, a statement released after the meeting said.

The committee decided to maintain a prudent monetary policy while enhancing countercyclical adjustments, keep liquidity at a reasonably ample level and maintain reasonable growth of aggregate social financing. The meeting was presided over by Vice-Premier Liu He, who is also head of the committee.

There are three policy banks-China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China. They can take quasi-fiscal measures, such as issuing bonds, to raise funds for infrastructure investment.

The meeting also urged commercial banks to diversify their capital supplement channels.

China will further expand the opening of the financial sector, encourage foreign financial institutions and funds to enter the domestic financial market and enhance the vitality and competitiveness of the financial system, the statement said.

Before the high-level meeting, the People's Bank of China-the central bank-also confirmed at its latest policy review meeting efforts to step up countercyclical policies amid pressure dragging on the economy.

A prudent monetary policy should push forward structural reforms and lower borrowing costs, a statement posted on the central bank's website said on Friday after the third-quarter meeting of the PBOC monetary policy committee chaired by Yi Gang, the bank's governor.

The PBOC declined to lower interest rates materially last week, although some other central banks have slashed rates and introduced quantitative easing to spur economic growth. The central bank has expressed a hawkish tone several times recently, disappointing the market.

The PBOC had declined to take immediate measures leading to massive monetary easing or to inject too much liquidity into the financial sector to avoid risks, analysts said.

In terms of monetary policy, especially the adjustment of interest rates, the authorities should consider long-term effects and support high-quality economic growth, according to Sheng Songcheng, former head of the PBOC's statistics and analysis department.

A deluge of strong stimulus policies, or the aggressive easing of monetary policies, would fuel inflation and boost asset prices, he said. Lowering interest rates might also add currency depreciation pressure, so the central bank should be cautious, Sheng added.

Song Yu, chief China economist with Beijing Gao Hua Securities, said, "The PBOC is reluctant to lower interest rates too much in light of rising inflation and risks of further exchange rate depreciation."

He said the possibility of interest rate cuts over the remainder of 2019 was lower than previously expected.

Beijing had become much more cautious about economic stimulus since mid-2018, which was a strong sign there was less scope for policy easing than in previous easing cycles, economists said.

"The Chinese government may be concerned that another round of large-scale credit easing could trigger a systemic financial crisis," said Lu Ting, chief economist with Nomura Securities.

In past easing cycles, about half of new credit went to the property sector, making China's economy in general and the financial sector in particular increasingly dependent upon property markets.