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2015 monetary policy, prudent with fine-tuning

(Xinhua)    13:57, January 14, 2015

BEIJING, Jan. 14-- Analysts may be divided over possible rate cuts in China's future, but they agree the country's monetary policy going forward will be cautious, with only minor adjustments being made.

China will maintain prudent monetary policies in 2015 with better coordination of tight and loose monetary measures and proper fine-tuning, said the People's Bank of China (PBOC) at a 2015 work meeting last Friday.

The central bank will strengthen support for the real economy, cut fund-raising costs and boost financial reforms, including reforms on interest rates, the yuan exchange rate and foreign exchange management.

Zeng Gang, researcher with the Chinese Academy of Social Sciences, said monetary policy should support the real economy and structural adjustment amid increasing downward pressure. He expects more liquidity in 2015.

The growth of M2, a broad measure of money supply that covers cash in circulation and all deposits, slowed to 12.3 percent year on year by the end of November.

The PBOC implemented new tools to tackle 2014's changing economic landscape, including Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL).

According to China Securities Journal, on Tuesday several large state-owned banks said the PBOC extended the terms of a 280-billion-yuan MLF that was due, so as to ease tight liquidity.

The new tools are more flexible and targeted to ensure sufficient liquidity, support the real economy and facilitate structural adjustment, Zeng said. Traditional measures like adjustment in interest rates and reserve requirement ratio (RRR) still remain an option.

Zhao Xijun, deputy director of Finance and Securities Institute under Renmin University of China, expects the scheme to be carried out this year and lower risk while improving banks' capacity to serve the real economy.

"The macro data are weak, but not collapsing," Zhang Zhiwei, chief economist with Deutsche Bank, said, "It seems to us there is no urgency to roll out stimulus."

He expected policy easing in the form of an RRR cut, interest rate cut, a rise of total social financing or even an official statement indicating policy shift.

"We forecast the first RRR cut in Q1 and first rate cut in Q2, more likely to start in March," Zhang added.

J.P. Morgan's chief China economist Zhu Haibin said weak domestic demand and low inflation will create a loose trend for the monetary policy.

According to the National Bureau of Statistics, growth in the consumer price index (CPI), the main gauge of inflation, rebounded slightly to 1.5 percent in December from November's 1.4 percent, its slowest increase since November 2009.

The producer price index (PPI) slumped 3.3 percent in December from one year earlier, the sharpest fall in more than two years, and dropped 1.2 percent year on year in 2014.

Easing inflationary pressure will give the central bank more room to initiate measures to support growth.

"Our forecast looks for average CPI at 1.5 percent and PPI at -1.5 percent in 2015," Zhu said, "Low inflation and PPI deflation will become the bigger concern."

He also believes one interest rate cut and two RRR cuts will happen, and are more possible in Q1 and Q2, which will likely be accomplished by other quantitative measures like MLF and PSL.

In the first 10 months of 2014, the PBOC refrained from traditional monetary easing like rate cuts and RRR cuts, but an unexpected rate cut was announced in November.

On Nov. 21, 2014, the central bank cut benchmark interest rates for the first time since the summer of 2012, fanning speculation that further moves like RRR cuts would follow in the coming months as 2014's growth figures are likely to register at the slowest pace in more than a decade.

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Editor:Ma Xiaochun,Bianji)

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