China's PBOC flags stimulus restraint but says policy should be flexible

Sat Mar 12, 2016 5:20am EST
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By Xiaoyi Shao and Kevin Yao

BEIJING (Reuters) - China's central bank won't resort to excessive stimulus to bolster growth but will keep a flexible stance in the event of an economic shock - domestic or global, Governor Zhou Xiaochuan said while reiterating the authority's prudent monetary policy.

Under the banner of prudent policy, the Chinese central bank has cut interest rates six times since November 2014 and has also reduced the amount of cash that commercial lenders must hold as reserves. The last policy easing was on Feb. 29 when the People's Bank of China (PBOC) lowered the reserve requirement ratio.

The central bank is trying to keep liquidity flush to support an economy undergoing the most significant structural reforms in two decades. But officials, including Zhou, have warned against excessive policy loosening that could intensify downward pressure on the yuan CNY=CFXS and spur capital outflows.

"The current monetary policy is prudent with a slight loosening bias," Zhou told to reporters at a scheduled news conference in Beijing on Saturday on the sidelines of the annual parliament session.

"We also want to stress that monetary policy should be adjusted dynamically depending on the judgment towards the economic situation," he added.

Zhou outlined the PBOC's five monetary policy stances as "loose", "appropriately loose", "prudent", "appropriately tight" and "tight", with flexibility on either side of each. China adopted an "appropriately loose" policy after the 2008 global crisis before shifting to a "prudent" stance in 2011.

"We would adjust our monetary policy on a real-time basis. If there are big changes in the domestic and global environment, we will keep the flexibility in monetary policy to counter shocks," Zhou said.

Central banks in Europe and Japan have resorted to negative interest rates in attempts to stimulate consumer demand and stoke worryingly low inflation. But the strategy has increased volatility in the financial markets and raised the specter of competitive currency devaluation.   Continued...

Zhou Xiaochuan, Governor of the People's Bank of China, answers a question at a news conference on the sidelines of the National People's Congress (NPC), China's parliament, in Beijing, China, March 12, 2016. REUTERS/Jason Lee