MNI BRIEF: PBOC Sees RRR Cut, Asset Prices Stressed

The People's Bank of China sees room for further reductions to the reserve requirement ratio and will focus monetary policy on safeguarding asset prices, said Li Yang, chairman of National Institution for Finance and Development, during the China Development Forum on Sunday. 

China’s monetary policy retains flexibility based on room for an RRR cut, he added, noting 1 percentage point of easing will unlock CNY2 trillion in liquidity. The central bank will explore mechanisms to maintain capital market stability as a normalised practice, said Li, former MPC member of the People’s Bank of China. The focus on the capital market will transform the central bank’s role to be both a lender of last resort to a hybrid market maker of last resort, he continued. (See MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market)

Monetary policy is gradually shifting toward a liquidity management-centered framework, where liquidity refers to the ability to convert assets into cash rapidly without significantly affecting market prices, Li noted, noting the development of capital markets is critical. China’s non-financial corporates have suffered significant deficits due to long-term high leverage, which heavily relies on external funding sources such as bank loans and fiscal expenditures, which poses one of the greatest risks to China’s economy.

The central bank will work to maintain the yuan exchange rate’s fundamental stability at a reasonable equilibrium as excessive volatility could signal risks, triggering capital outflows, he warned.