PBOC to closely track liquidity amid crackdown on debt levels

Bloomberg

China’s central bank said it will closely monitor liquidity conditions amid its campaign to
reduce debt levels, in a quarte-rly report where it reiterated a commitment to “prudent and neutral” monetary policy.
The People’s Bank of China seeks an “optimal” environment to help stabilize economic growth, while facilitating dele-veraging, curbing bubbles and preventing risks, according to a quarterly report on monetary policy implementation released in Beijing. The document, mainly a review of policy conducted
in the third quarter, also said
the central bank aims to deepen reform in interest-rate and
foreign-exchange markets.
“We shall strike a balance between keeping liquidity basically stable and reducing the leverage,” the PBOC said in the report. “Overall, the prudent and neutral monetary policy has achie-
ved relatively positive results,”
it said, reiterating the policy
settings it’s aimed for all year.
Stability is job No. 1 for China’s policy makers, who have been working to balance continued expansion with defusing
the country’s debt bomb and deepening economic reforms. Separately, the PBOC and other regulators unveiled sweeping new draft rules for asset-management products, the latest step to help reduce risk in the
financial system.
President Xi Jinping has made preventing and controlling financial risk to avoid asset bubbles a key priority this year.
He used a twice-a-decade Communist Party congress last month to shift the emphasis from a focus on growth targets — which delivered decades of breakneck expansion — to more attention on risk reduction and quality-of-life issues.

FOREIGN FIRMS
The PBOC also referred to easing access for international firms in the report, comments that follow an historic announcement November 10 that will see China remove foreign ownership limits on banks while allowing overseas companies to take majority stakes in local securities ventures. The move scraps another barrier to the country’s engagement with the world and should bolster competition in the local financial system.
Commenting on the yuan, the PBOC said the flexibility of the exchange rate has improved
and supply and demand for the currency is more balanced.
As a result, it’s necessary to “neutralize” the counter-cyclical measures that are aimed at smoothing out volatility.
The quarterly report follows losses in Chinese bonds in recent days amid signs of quickening inflation and concern that Beijing will intensify the deleveraging campaign. PBOC Gover-
nor Zhou Xiaochuan has made a series of blunt warnings in recent weeks about debt levels in the economy.
“While reining in the total leverage ratio, we shall prioritize reducing the leverage of state-owned enterprises, focus on tackling ‘zombie firms’ and
promote the debt-to-equity swap in a market-oriented and law-based manner,” the PBOC said in the report.

CASH INJECTIONS
Officials also stressed the importance of macro-prudential measures. “A monetary policy framework is flawed if the CPI is the only anchor,” the report said. “Even when the CPI is relatively stable, asset prices and financial markets can fluctuate wildly.”
In late October, the PBOC injected 63-day funding into the financial system for the first time, reassuring lenders about year-end funding availability while also intensifying the deleveraging effort by increasing borrowing costs.
The maneuver aims to smooth the seasonal volatility of fiscal factors, including the large
debt issuance by the central and local governments, the central bank said. The PBOC will continue to use reverse repos with various maturities to maintain liquidity in the banking system “basically stable.”