PBOC sharpens focus on inflation

Q3 report assures liquidity support to stabilize real estate and infrastructure

China's central bank will likely keep its monetary policy accommodative to facilitate the country's economic recovery in the coming months and sharpen its focus on the overall objective of keeping inflationary risks at bay, experts said on Thursday after reviewing a key report.

The third-quarter monetary policy report, released by the People's Bank of China on Wednesday, cautioned against any potential rise in inflationary pressure going forward, although there has been a recent deceleration in price growth.

This, experts said, signals that the PBOC will arrange future monetary support at an appropriate strength and in a forward-looking manner, to facilitate steady economic growth while ensuring stable price levels.

For the rest of the year, maintaining ample liquidity is expected to remain a policy priority of the PBOC, alongside ramped-up structural support to both stabilize the real estate sector and accelerate infrastructure investment, they said.

"We will pay great attention to the potential possibility of a rise in inflation in the future, especially changes on the demand front," the report said.

Experts drew attention to the wording, saying the second-quarter report stressed it is important to "keep a close watch on inflationary situations both at home and abroad".

Recovery of effective demand in China has become "increasingly evident", the PBOC said in the third-quarter report, promising to properly handle any potential rise in inflation by consolidating the increase in food supply and energy market stability.

The report follows data indicating inflation in China slowed and consumer spending weakened as a rise in COVID-19 cases renewed headwinds to economic activity.

China's consumer price index, a main gauge of inflation, rose by 2.1 percent year-on-year in October, down 0.7 percentage point from September, official data showed.

"We think overall demand is still below the potential level. So, the PBOC's emphasis on inflation appears to reflect a precautionary stance based on the medium to long-term perspective," said Cheng Qiang, chief macroeconomic analyst at CITIC Securities.

With limited short-term inflationary pressures, more substantial monetary support remains necessary to strengthen the real economy and replenish market liquidity, Cheng said, adding a cut in banks' required reserves is still possible in the coming months.

Citing that the basis of economic recovery still needs to be consolidated, the PBOC vowed in the report it will maintain reasonable growth in money supply and credit expansion, creating accommodative liquidity condition for year-end economic policy implementation.

The central bank will accelerate the use of special loans aimed at safeguarding the delivery of housing projects currently underway, properly scale up the program when needed and encourage commercial banks to provide additional financial support, all to promote steady and healthy development of the housing market.

Efforts will also be made to generate more effective investments in the remainder of the year by accelerating the use of proceeds of relevant financial instruments to support infrastructure construction, the report said.

The PBOC report's emphasis on keeping a lid on inflation indicates that monetary policy might turn more prudent over the medium term and rely more on structural support as domestic demand recovers, experts said.

The report said more precise COVID-19 containment may help consumer demand rebound and the country's recent elevated growth in broad money supply might have a lag effect if aggregate demand further recovers.

Vowing to launch high-level opening-up pilot programs in cross-border trade and investment, the latest report said China will promote renminbi internationalization "in an orderly manner". The previous report for the second quarter had said such promotion will be done "stably and prudently".