China’s central bank will hold off on further monetary policy tightening and could even slightly loosen its grip in coming months as a deleveraging drive threatens economic growth and job creation ahead of a leadership reshuffle, policy insiders said.
Higher short-term funding costs, driven by a regulatory crackdown on banks’ riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of this year’s Communist Party Congress when President Xi Jinping is expected to consolidate his control.
The challenge is to counter the risks from excessive debt and shadow banking without endangering a growth target of around 6.5 percent — and previous experience suggests growth will be the priority.
“The leadership favors stability this year. We do not want to boost growth aggressively but we cannot allow growth to slow too sharply,” said a policy adviser.
“Many companies face difficulties and higher interest rates will push up borrowing costs, which will be unfavorable for economic growth.”
The sources are involved in internal policy discussions and offer advice to policymakers but are not part of the final decision-making process.
The People’s Bank of China (PBoC) did not respond to a Reuters’ request for comment.
The weighted average lending rate of China’s non-financial firms rose by 26-basis points in the first quarter to 5.53 percent, the PBoC has said.
Officials were tightening prudential requirements for banks during that period to try to tame risks from soaring property prices and debt.
The PBoC also guided market rates higher during the first quarter, including immediately after the Federal Reserve raised rates in March, in what analysts saw partly as an effort to counter pressure on the yuan from capital outflows.
Many analysts expect borrowing costs to have risen further in the second quarter, although the central bank has injected substantial liquidity to avoid an end-June cash crunch and did not follow this month's increases in US interest rates.
The official China Securities Journal reported earlier in June that commercial banks have started to raise mortgage rates and even preferential rates for state-owned companies.
Authorities are expected to maintain a tighter regulatory environment given the focus on whittling down the large build-up of debt, but some of the insiders said that smaller banks could get some relief on the policy front to support activity.
One option to ease funding difficulties for those banks would be to cut the reserve requirement ratio (RRR), which sets the amount of cash that must be held against loans.

Source: Arab News