Monetary policy will 'remain prudent, flexible'

China's inflation is generally "moderate", and the current prudent monetary policy will remain flexible and targeted to support high-quality economic development, the central bank governor said.

Yi Gang, governor of the People's Bank of China, made the remarks as G20 finance ministers and central bank governors met for their fourth official meeting under the Italian G20 presidency on Wednesday.

The G20 meeting paid great attention to inflationary pressure rising worldwide, as central banks are closely monitoring current price dynamics. They called on monetary authorities to meet mandates－including price stability－and remain committed to clear communication of policy stances, according to a communique published after the meeting.

In China, experts said on Thursday that financial support for the real economy is projected to be strengthened in the fourth quarter, driven by government bond issuances and bank lending, although the latest financial data were weaker than expected.

The growth pace of total social financing, a measure of all funds floating into the real economy and released by the central bank on Wednesday, moderated to 10 percent year-on-year in September, down from 10.3 percent in August. That is lower than market expectations.

The rising risk aversion of banks and weaker investment demand might have constrained the growth of new loans, said analysts, because recent headwinds－power shortages, floods in some provinces and the continued grip of the COVID-19 pandemic－might dampen economic momentum.

Financial data from the central bank showed that growth of medium- to long-term borrowings of corporates and households slowed in September, which could be a result of weak investment amid rising energy and raw material prices alongside risk exposure in the real estate sector, said Cheng Qiang, chief macro analyst with Citic Securities.

The PBOC also released September's broad money supply, or M2, on Wednesday. It indicated a moderately accelerated growth of 8.3 percent year-on-year from 8.2 percent by August. RMB-denominated loans increased by 1.66 trillion yuan ($258.3 billion), compared with 1.22 trillion yuan in August and down by 232.7 billion yuan year-on-year.

In July, China's central bank cut the reserve requirement ratio－the cash amount that should be deposited in bank vaults－and launched an additional re-lending quota of 300 billion yuan in September, with the intention of boosting credit supply.

The central bank still has policy tools to strengthen financial support in the coming quarter, including injecting more liquidity through medium-term lending facility and reverse repurchase agreements. Meanwhile, the government's spending is predicted to increase in the fourth quarter, as local government bond issuances may accelerate, said Wen Bin, chief analyst with China Minsheng Bank.

"From the perspective of optimizing the liquidity situation in the banking system and reducing lending costs, it is necessary and there is policy room to further cut the RRR. But as the US Federal Reserve is expected to tighten monetary policy and domestic factory gate prices are rising, the PBOC should be cautious to choose the right time (to cut the RRR)," Wen said.

Persistent inflationary pressure limits the potential scope for monetary policy easing. Government bond yields have been rising in the United States and China, which to some extent reflects the risk of inflation, said Zhang Zhiwei, chief economist of Pinpoint Asset Management.

On Wednesday, the US Fed unveiled the minutes of the September meeting of the Federal Open Market Committee, indicating that it may "taper" or reduce asset purchases as early as next month, and more Fed officials predicted an interest rate rise in 2022.

Tobias Adrian, the financial counsellor and director of the International Monetary Fund's Monetary and Capital Markets Department, said "In a context of higher price pressures, investors are now pricing in a rapid and fairly sharp tightening cycle for many emerging markets, although the increase in inflation is expected to be temporary".