PBOC pledges to increase liquidity supply

BEIJING - China will increase liquidity via open market operations and cutting banks' required reserves to steer the economy towards a soft landing, the official Xinhua news agency quoted an unnamed central bank official as saying late on Wednesday.

The People's Bank of China will "increase reverse repo operations and cut the reserve requirement ratio at an appropriate time ... to release liquidity," the official was quoted as saying in an interview with the state news agency.

"We will take comprehensive and effective measures to make pre-emptive policy adjustment at appropriate time and pace so as to guide steady and appropriate growth in money and credit supply, to keep banking system liquidity at a reasonable level and to support stable and relatively fast economic growth," the official said.

The remarks - consistent with the easing policy bias that has been in place since autumn 2011 when Premier Wen Jiabao unveiled his "fine-tuning" campaign to support growth - came after China's bank lending surged in March to 1.01 trillion yuan ($160 billion), the biggest credit extension since January 2011.

Broad M2 money supply also rose to a three-month high of 13.4 percent in March from a year earlier, ahead of forecasts for 12.9 percent growth and following February's 13 percent expansion, data from the central bank showed last week.

The stronger-than-expected credit data has led some analysts to question whether the PBOC might slow the pace of easing, given that existing measures appear to have gained traction.

Economists polled by Reuters last month said they expected 150 basis points of RRR cuts for the remainder of this year, with two cuts of 50 bps in the second quarter and one in Q3.

The unnamed central bank official also told Xinhua that almost 800 billion yuan of liquidity will be unlocked in the second quarter and liquidity supply will remain sufficient.

Analysts estimate that about 400 billion yuan of liquidity is released into China's financial system with every 50 bps cut in RRR.

The interview with Xinhua did not mention any outright cut in interest rates, in line with the market consensus in the Reuters poll that such a move is unlikely.

Meanwhile, the central bank would support the financing demand of the central government's key investment projects, affordable housing construction as well as mortgage loans for people buying their first homes for self use, the official said.

The central bank would also create easier and more diversified channels to meet funding demand from small companies, such as allowing them to issue bonds, the official said.