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PBoC: Neutral policy stance with slightly looser bias - Nomura

FXStreet (Bali) - The PBoC released its Q3 monetary policy report on Nov 6th, indicating a neutral policy stance with slightly looser bias, notes Nomura.

Key Quotes

The PBoC reiterated its "prudent" policy stance but, in our view, indicated a slightly looser bias. Compared with the Q2 report, the PBoC stressed that it would improve its policy flexibility and adjust its policy according to economic fundamentals, so as to provide a neutral and appropriate monetary and financial environment for the economic structural upgrading.

The PBoC emphasized that the economic downward pressures and potential risks may increase for a certain period of time during the structural change process. The report indicated the PBoC's intention, on the one hand, to maintain stable growth, and on the other hand, to avoid over-stimulus, which would likely worsen the economic structure and push up inflation and leverage.

The PBoC confirmed its two new policy instruments – the medium-term lending facility (MLF) and pledged supplementary lending facility (PSL). The report indicated that the MLF was established in September 2014 to provide medium-term base money to commercial and policy banks that meet the macroprudential requirement, collateralised by eligible assets, such as highly rated bonds. Through the MLF, the PBoC injected RMB500bn in September and RMB269.5bn in October, with a maturity of three months and interest rate of 3.5%.

The report mentioned that the PBoC used the PSL facility to gradually improve the room for credit provision for small- and medium-sized financial institutions and large financial institutions that support shanty-town renovation and trade. Since September, the PBoC has lowered the interest rate of PSL funding. But the report offered neither a formal definition of the PSL facility nor details of the facility's outstanding amount and interest rate level.

The report attributed the slowdown of M2 growth (June: 14.7% y-o-y; September: 12.9%) mainly to the shrinking of interbank financing activity as a result of intensified supervision. The smaller FX inflows can also explain part of the slowdown, according to report.

Overall, we think the report indicated a slightly looser bias, which is largely consistent with our view. We continue to expect a 50bp cut in the bank reserve requirement ratio per quarter from now through Q4 2015. We maintain our view of a short-lived growth upswing to 7.6% y-o-y in Q4 from 7.3% in Q3, resulting in full-year 2014 growth of 7.4%, before slowing to 6.8% in 2015.

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