The head of China's central bank's research department told a forum in Beijing on Friday that China's current monetary policy is appropriate but that liquidity management is increasingly important in the face of high funding costs. The remarks by the People's Bank of China (PBOC) research bureau head Lu Lei were reported in the official Securities Times newspaper on Saturday.
"On the one hand, we can see the difficulties in fundraising in the real economy, being both difficult and expensive," he was quoted as saying. "On the other hand, we see high costs for off-balance sheet financing at a large number of banking institutions; these are two sides of the same coin." He said next year could see more policy adjustments to reduce funding costs, buttressed by the creation of new financial products and services.
The comments follow the PBOC's surprise cut in its benchmark lending rates in November, accompanied by moves to inject cash into the system through new short- and medium-term instruments. Sources say the PBOC has also told financial institutions it will further ease loan-to-deposit ratio requirements, having already relaxed their enforcement in October, freeing up more liquidity by unlocking existing cash held by banks and in theory increasing their propensity to lend.
The preference for more targeted instruments and behind-the-scenes easing is seen as less risky than a system-wide cut in the bank reserve requirement ratios (RRR), which could pour as much as 2.4 trillion yuan of fresh cash into the system after accounting for the money-multiplying effect of fresh lending. However, while bank lending rebounded in November, there is little sign of an impact of funding on lending rates, and the lending rebound coincided with a massive leverage-driven rally in China's stock markets, raising concerns that more cash will only flow into speculation instead of productive investment.