China Must Avoid Massive Stimulus and Control Debt, Says PBOC’s Yi

(Bloomberg) --

China isn’t in a rush to add massive monetary stimulus, in contrast with other central banks around the world, and must maintain a prudent policy stance, central bank Governor Yi Gang said.

Overall financial risks are contained and those in the shadow banking sector and some key institutions have been resolved, said Yi, speaking at a joint briefing in Beijing with Finance Minister Liu Kun and National Bureau of Statistics head Ning Jizhe on Tuesday.

Even as China grapples with growth on pace for the slowest expansion in almost thirty years, policy makers are holding back from all-out stimulus as they continue efforts to rein in financial risks. That’s in contrast to central banks such as the Federal Reserve and the European Central Bank, which are either cutting borrowing costs further or flagging a willingness to do so.

“Chinese officials remain determined to avoid quick and easy reflation,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “Interest rates may still need to come down in the coming months to cushion the slide in growth. Anyone expecting a sharp Chinese growth bounce, however, may be disappointed.”

Futures on China’s 10-year government bonds reversed gains as Yi spoke, and the yield on cash bonds extended an increase. Interest rates are appropriate and the central bank has ample monetary policy tools, the PBOC said in a statement ahead of the briefing, reiterating the People’s Bank of China’s policy stance. Inflation remains relatively moderate, Yi said, and the central bank will remain patient.

“We are not in a rush to roll out massive rate cuts or QE like some other central banks,” he said.

Growing Pains

China’s industrial production in August rose at the slowest single month pace since 2002, exports unexpectedly contracted and a producer prices index fell deeper into deflation. That’s adding pressure on policy makers to do more to support the economy amid the risk of yet-higher tariffs in the trade war with the U.S., and slowing global growth.

China’s actual tax cuts will be larger than expected this year while the manufacturing and private sectors are the biggest beneficiaries of those cuts, said Finance Minister Liu. The government in March announced tax cuts of 2 trillion yuan ($281 billion) for the year as part of what it described as the largest ever fiscal stimulus plan for the country.

Infrastructure spending is accelerating and the key is to ensure capital from all sources is put to good use for the projects, said Ning of the National Bureau of Statistics.

The PBOC cut the amount of cash banks must hold as reserves this month to the lowest level since 2007, though it’s still holding off on cutting borrowing costs more broadly. Analysts are calling for stronger easing signals after a new gauge of borrowing costs was only slightly lowered on Friday.

While the PBOC has tweaked policies in recent months to support the slowdown, it has refrained from more aggressive stimulus out of concern over financial stability and high debt levels. The one-year reference rate for bank loans was set Friday at 4.2% for September versus 4.25% in August.

“Beijing seems deeply concerned that another round of large-scale credit easing could trigger a systemic financial crisis,” said Lu Ting, chief China economist at Nomura International Ltd. in Hong Kong. “A new master plan has become increasingly evident that features no flood of credit, targeted credit easing and rate cuts that exclude the property sector.”

Yi repeated that China has no timetable for the introduction of a digital currency, but said the central bank has made good progress studying digital currencies since 2014. If a digital currency is used across borders, there will be anti-money laundering and other regulatory issues that need to be addressed, he said.

--With assistance from Yinan Zhao and Helen Sun.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net;James Mayger in Beijing at jmayger@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Kevin Hamlin, James Mayger

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